Five years ago, there was a near-complete consensus that aggregate demand management was the exclusive province of central banks and their conventional open-market operations. Problems of legislative process of implementation meant that fiscal policy worked more slowly than conventional monetary policy. Even should an economy find itself in a liquidity trap, whatever that means, credible commitments by central banks to hit future nominal spending and nominal exchange rate targets still seemed to dominate fiscal policy.
Today because we are in a depressed economy we think differently. Or do we? How differently do we think, and why?
Suggestions that we should move away from exclusive reliance on central banks and conventional open-market operations in a liquidity trap have three possible justifications:
Our uncertainty about what is the right model of the economy.
Our belief that conventional open-market operation monetary policy tools weaken in situations like the depressed economy of the present--that in a depressed economy there is a lack of power on the part of central banks.
A possible lack of will on the part of central banks: a belief on the part of central bankers that while spending flows ought to be higher, it ought to be elected governments that take steps to make it so.
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
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
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.
Ben S. Bernanke (2000), "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). http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf
Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack (2011), "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking 7 (March 2011): pp. 3-25 and pp. 38-40 only. http://www.ijcb.org/journal/ijcb11q1a1.pdf
Lloyd Metzler (1951). "Wealth, Saving, and the Rate of Interest". Journal of Political Economy 59:2 (April), pp. 93-116 http://www.jstor.org/stable/1825743
Jan Hazius and Sven Jari Stehn (2011). "The Case for a Nominal GDP Level Target". Goldman Sachs U.S. Economic Analyst 11/41 (October 14) http://delong.typepad.com/1014wkly.pdf
