Econ 191: Spring 2012: U.C. Berkeley: Fiscal Policy in the Great Recession (April 17, 2012)

Readings:

Readings from David Romer and Christina Romer: Econ 134: Macroeconomic Policy from the Great Depression to the Great Recession:

• Extending the IS/MP/IA Framework Slides
  • David H. Romer, Short-Run Fluctuations (open access, 2012), Section IV, “The Liquidity Trap”
• The Zero Lower Bound in Practice Slides
  • Ben S. Bernanke, “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” in Ryoichi Mikitani and Adam S. Posen, eds., Japan’s Financial Crisis and Its Parallels to U.S. Experience, pp. 149-166 (Washington, D.C.: Institute for International Economics, 2000).
  • Peter Temin and Barrie A. Wigmore, “The End of One Big Deflation,” Explorations in Economic History 27 (October 1990): 483-502
  • Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack, “The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases,” International Journal of Central Banking 7 (March 2011): 3-25 and 38- 40 only
• Does Fiscal Policy Matter? Slides
  • Robert E. Hall, “By How Much Does GDP Rise If the Government Buys More Output?” Brookings Papers on Economic Activity (Fall 2009): 183-195 only
  • Valerie A. Ramey and Matthew D. Shapiro, “Costly Capital Reallocation and the Effects of Government Spending,” Carnegie-Rochester Conference Series on Public Policy 48 (1998): 145-147 and 174-189 only.
  • Christina D. Romer and David H. Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review 100 (June 2010): 763-787 only
• Fiscal Policy in the Great Recession Slides
  • John Taylor, “The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy,” American Economic Review: Papers and Proceedings 99 (May 2009): 550-555.
  • Christina D. Romer, “The Case for Fiscal Stimulus: The Likely Effects of the American Recovery and Reinvestment Act,” Speech at the U.S. Monetary Policy Forum, February 27, 2009.
  • Council of Economic Advisers, “The American Recovery and Reinvestment Act of 2009 First Quarterly Report,” September 10, 2009, pp. 1-17 and 23-40 only.

Readings from J. Bradford DeLong:

• Fiscal Policy in a Depressed Economy: Slides
• Fiscal Policy in a Depressed Economy: Conference Draft

and, on fiscal policy:

• The Basic Arithmetic of Self-Financing Fiscal Policy
• The Not-so-Simple Arithmetic of Fiscal Policy in a Depressed Economy
• Under These Circumstances, a National Debt Is Indeed a National Blessing
• The Changing Multiplier since 1925

and, on monetary policy:

• Thoughts on the Limits of Monetary Policy in a Liquidity Trap
• On the Fed's Policy of Quantitative Easing

and, on hysteresis:

• The Shadow Cast by the Downturn: Many Zeroes and Double-Zeroes on the Global Roulette Wheel
• Hysteresis and the American Unemployment Problem

and, on rhetoric:

• A Question for Gavyn Davies: Somehow the B---s--- Artists Have Won

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Romer and Romer Outlines:

Extending the IS/MP/IA Framework:

The framework extended:

• Assumptions
  • The nominal interest rate can’t be negative
  • In the basic model, expected inflation equals actual inflation
• The AD Curve
  • Where we are headed
  • The IS-MP diagram
  • Deriving the AD curve
• A Little Bit about the Case of Money Targeting

Examples:

• A Massive Fall in Planned Expenditure
  • The initial situation
  • The shock
  • The dynamics of the economy
  • What happens when there is a rebound in planned expenditure
  • How seriously should we take this?
• The Importance of “Using Rather than Saving Your Ammunition”
  • The initial situation
  • What happens if the central bank “saves its ammunition”
  • How the central bank can avoid this outcome

The Zero Lower Bound in Practice:

Strategies for dealing with the ZLB:

• Starting point: IS shifts back enough that we are in flat portion of MP
• Fiscal policy
• Non-standard open market operations (or quantitative easing)
• Communications policy
• Deliberate currency depreciation
• Methods to raise expected inflation
• Raising expected future real growth

Japan since the collapse of its real estate bubble:

• Diagnosis of the problem
• Bernanke’s critique of Japanese monetary policy
• Japan’s growth record

The United States in the 1930s:

• Recovery in the 1930s
• Devaluation as a regime shift
• Actual fiscal and monetary expansion

The United States since fall 2008:

• Major IS shock in fall 2008; quickly hit the zero nominal bound
• Impact of large-scale asset purchases (quantitative easing)
• Federal Reserve communications policy

Does Fiscal Policy Matter?

Fiscal policy in the IS-MP-IA model:

• Short-run effects on output and the real interest rate: the IS-MP diagram
• Effects on output, inflation, and the real interest rate over time: the AD-IA diagram

Hall:

• Hall’s regression
• What question are we trying to answer?
• Reasons the regression results might overstate or understate the fiscal multiplier
• Hall’s conclusion

Ramey and Shapiro:

• How Ramey and Shapiro’s approach differs from Hall’s
• The Ramey-Shapiro dates
• Results

Romer and Romer:

• Romer and Romer’s approach

Fiscal Policy in the Great Recession:

Overview:

• Economic Stimulus Act of 2008
• American Recovery and Reinvestment Act of 2009
• Additional fiscal actions

Estimated effect of 2008 ESA:

• Expected effects
• Taylor’s test
  • Evidence
  • Evaluating Taylor’s approach
• Another test

Estimated effect of 2009 ARRA:

• Reasons to expect the effects to be larger or smaller than usual
• Comparison to a statistical baseline
• Cross-country evidence
• A natural experiment