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1、MACROECONOMICS 2010 Worth Publishers, all rights reserved 2010 Worth Publishers, all rights reservedS E V E N T H E D I T I O NPowerPoint Slides by Ron CronovichN. Gregory MankiwC H A P T E RStabilization Policy15Modified for EC 204 by Bob MurphyIn this chapter, you will learn:about two policy debat
2、es:1. Should policy be active or passive?2. Should policy be by rule or discretion?3CHAPTER 15 Stabilization PolicyQuestion 1:Should policy be active or passive?Growth rate of U.S. real GDPPercent change from 4 quarters earlierAverage growth rateIncrease in unemployment during recessionspeaktroughin
3、crease in no. of unemployed persons (millions)July 1953May 19542.11Aug 1957April 19582.27April 1960February 19611.21December 1969November 19702.01November 1973March 19753.58January 1980July 19801.68July 1981November 19824.08July 1990March 19911.67March 2001November 20011.50Increase from 12/2007 thru
4、 6/2009: 7.2 million!Increase from 12/2007 thru 6/2009: 7.2 million!6CHAPTER 15 Stabilization PolicyArguments for active policyRecessions cause economic hardship for millions of people.The Employment Act of 1946: “It is the continuing policy and responsibility of the Federal Government topromote ful
5、l employment and production.”The model of aggregate demand and supply (Chaps. 9-13) shows how fiscal and monetary policy can respond to shocks and stabilize the economy.7CHAPTER 15 Stabilization PolicyArguments against active policyPolicies act with long & variable lags, including:inside lag: the ti
6、me between the shock and the policy response.takes time to recognize shocktakes time to implement policy, especially fiscal policyoutside lag: the time it takes for policy to affect economy.If conditions change before policys impact is felt, the policy may destabilize the economy.8CHAPTER 15 Stabili
7、zation PolicyAutomatic stabilizersdefinition: policies that stimulate or depress the economy when necessary without any deliberate policy change.Designed to reduce the lags associated with stabilization policy.Examples:income taxunemployment insurancewelfare9CHAPTER 15 Stabilization PolicyForecastin
8、g the macroeconomyBecause policies act with lags, policymakers must predict future conditions.Two ways economists generate forecasts:Leading economic indicators data series that fluctuate in advance of the economyMacroeconometric modelsLarge-scale models with estimated parameters that can be used to
9、 forecast the response of endogenous variables to shocks and policies10CHAPTER 15 Stabilization PolicyThe LEI index and real GDP, 1960ssource of LEI data:The Conference BoardThe Index of Leading Economic Indicators includes 10 data series (see p.258 ).11CHAPTER 15 Stabilization PolicyThe LEI index a
10、nd real GDP, 1970ssource of LEI data:The Conference Board12CHAPTER 15 Stabilization PolicyThe LEI index and real GDP, 1980ssource of LEI data:The Conference Board13CHAPTER 15 Stabilization PolicyThe LEI index and real GDP, 1990ssource of LEI data:The Conference BoardMistakes forecasting the 1982 rec
11、essionUnemployment rate15CHAPTER 15 Stabilization PolicyForecasting the macroeconomyBecause policies act with lags, policymakers must predict future conditions.The preceding slides show that the forecasts are often wrong. This is one reason why some economists oppose policy activism. 16CHAPTER 15 St
12、abilization PolicyThe Lucas critiqueDue to Robert Lucaswho won Nobel Prize in 1995 for rational expectations.Forecasting the effects of policy changes has often been done using models estimated with historical data. Lucas pointed out that such predictions would not be valid if the policy change alte
13、rs expectations in a way that changes the fundamental relationships between variables.17CHAPTER 15 Stabilization PolicyAn example of the Lucas critiquePrediction (based on past experience):An increase in the money growth rate will reduce unemployment.The Lucas critique points out that increasing the
14、 money growth rate may raise expected inflation, in which case unemployment would not necessarily fall. 18CHAPTER 15 Stabilization PolicyStabilization Success a Figment of Data?Christina Romer: Construct better “old” data and reconstruct “bad” current data. Assess volatility of unemployment and outp
15、ut. Finds significantly less difference in pre- and post-WWII experience.Question about smooth labor force participation rates versus pro-cyclical assumption.Question about relationship between commodity production and aggregate output during Great Depression. 19CHAPTER 15 Stabilization PolicyThe Ju
16、rys outLooking at recent history does not clearly answer Question 1: Its hard to identify shocks in the data.Its hard to tell how outcomes would have been different had actual policies not been used.20CHAPTER 15 Stabilization PolicyQuestion 2:Should policy be conducted by rule or discretion?21CHAPTE
17、R 15 Stabilization PolicyRules and discretion: Basic conceptsPolicy conducted by rule: Policymakers announce in advance how policy will respond in various situations, and commit themselves to following through.Policy conducted by discretion:As events occur and circumstances change, policymakers use
18、their judgment and apply whatever policies seem appropriate at the time.22CHAPTER 15 Stabilization PolicyArguments for rules1.Distrust of policymakers and the political processmisinformed politicianspoliticians interests sometimes not the same as the interests of society: political business cycle?23
19、CHAPTER 15 Stabilization PolicyPolitical Business Cycle?24CHAPTER 15 Stabilization PolicyArguments for rules2.The time inconsistency of discretionary policydef: A scenario in which policymakers have an incentive to renege on a previously announced policy once others have acted on that announcement.D
20、estroys policymakers credibility, thereby reducing effectiveness of their policies.25CHAPTER 15 Stabilization PolicyExamples of time inconsistency1.To encourage investment, govt announces it will not tax income from capital. But once the factories are built, govt reneges in order to raise more tax r
21、evenue.26CHAPTER 15 Stabilization PolicyExamples of time inconsistency2.To reduce expected inflation, the central bank announces it will tighten monetary policy. But faced with high unemployment, the central bank may be tempted to cut interest rates.27CHAPTER 15 Stabilization PolicyExamples of time
22、inconsistency3.Aid is given to poor countries contingent on fiscal reforms. The reforms do not occur, but aid is given anyway, because the donor countries do not want the poor countries citizens to starve.28CHAPTER 15 Stabilization PolicyMonetary policy rules a. Constant money supply growth rateAdvo
23、cated by monetarists.Stabilizes aggregate demand only if velocity is stable.29CHAPTER 15 Stabilization PolicyMonetary policy rules b. Target growth rate of nominal GDPAutomatically increase money growth whenever nominal GDP grows slower than targeted; decrease money growth when nominal GDP growth ex
24、ceeds target.a. Constant money supply growth rate30CHAPTER 15 Stabilization PolicyMonetary policy rules c. Target the inflation rateAutomatically reduce money growth whenever inflation rises above the target rate.Many countries central banks now practice inflation targeting, but allow themselves a l
25、ittle discretion.a. Constant money supply growth rateb. Target growth rate of nominal GDP31CHAPTER 15 Stabilization PolicyInflation Targeting32CHAPTER 15 Stabilization PolicyPrice Level vs. Inflation Targeting33CHAPTER 15 Stabilization PolicyCentral bank independenceA policy rule announced by centra
26、l bank will work only if the announcement is credible. Credibility depends in part on degree of independence of central bank.Inflation and central bank independenceaverage inflationindex of central bank independenceCentral Bank Independence and GrowthChapter Summary1. Advocates of active policy beli
27、eve:frequent shocks lead to unnecessary fluctuations in output and employmentfiscal and monetary policy can stabilize the economy2.Advocates of passive policy believe:the long & variable lags associated with monetary and fiscal policy render them ineffective and possibly destabilizinginept policy in
28、creases volatility in output, employmentChapter Summary3.Advocates of discretionary policy believe:discretion gives more flexibility to policymakers in responding to the unexpected4.Advocates of policy rules believe:the political process cannot be trusted: Politicians make policy mistakes or use policy for their own interestscommitment to a fixed policy is necessary to avoid time inconsistency and maintain credibility
