DOCSLIB.ORG

Postwar Macroeconomics: the Evolution of Events and Ideas

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Postwar Macroeconomics: the Evolution of Events and Ideas This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The American Economy in Transition Volume Author/Editor: Martin Feldstein, ed. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-24082-7 Volume URL: http://www.nber.org/books/feld80-1 Publication Date: 1980 Chapter Title: Postwar Macroeconomics: The Evolution of Events and Ideas Chapter Author: Robert J. Gordon, Arthur M. Okun Chapter URL: http://www.nber.org/chapters/c11296 Chapter pages in book: (p. 101 - 182) 2 Postwar Macroeconomics: The Evolution of Events and Ideas 1. Robert J. Gordon 2. Arthur M. Okun 3. Herbert Stein 1. Robert J. Gordon Experience, some people say, is like a light on a caboose, illuminating only where we aren't going. But we scrutinize the past for its elements of prologue, and consolation. [George F. Will, 1979] 2.1 Introduction The main issues in current discussions of macroeconomic theory and policy are very different from those of the late 1940s. Most shifts in economic opinion can be traced to the impact of changing events on ideas. For example, in some cases the evolution of the economic aggre- gates helped to decide a debate between schools of thought. In other cases events occurred that could not be understood within the context of existing paradigms and required the invention of new explanations. The most useful framework for an analysis of postwar changes in macroeconomics is the familiar m/croeconomic dichotomy between de- mand and supply. Most questions in macroeconomics can be usefully divided between issues concerning (a) the determinants and control of aggregate demand and (b) those concerning aggregate supply, that is, Robert J. Gordon is professor of economics at Northwestern University. This research has been supported by the National Science Foundation and is part of the NBER's research program in economic fluctuations. I am grateful to Jon Frye for research assistance, and to Martin N. Baily, Alan Blinder, Robert Eisner, Arthur M. Okun, Edmund S. Phelps, Joan Robinson, and Robert M. Solow for their helpful suggestions. Readers should note that the extensive references to "M2" in the text refer to the old definitions, not the new, more comprehensive definitions introduced in January 1980. 101 102 Robert J. Gordon/Arthur M. Okun/Herbert Stein the factors that influence the division of changes in aggregate demand between prices and real output. In the early postwar years macroeco- nomics was almost exclusively concerned with the explanation of aggre- gate demand within a Keynesian framework that emphasized the need for an activist fiscal policy to offset the instability of private spending. By the end of the 1970s concern with demand management had been pushed aside by two central supply issues—that of explaining and con- trolling inflation and that of determining the causes and cures of the secular slowdown in the growth of aggregate labor productivity that had occurred in the past decade.1 Until 1973 the central area of macroeconomic controversy was the determination and control of aggregate demand. Two main issues were the subject of debate: the relative potency of monetary and fiscal policy and the case for the activist use of discretionary policy as contrasted with a nonactivist policy stance relying on rules. Opinions on the first question shifted almost continuously, from the heavy emphasis on fiscal policy and low regard for monetary policy common in the late 1940s, to an intermediate view that incorporated both monetary and fiscal pol- icy in discussions of the late 1950s and early 1960s, to a common ten- dency after 1968 to doubt the potency of fiscal policy and assign a strong causal role for monetary changes as initiating fluctuations in aggregate demand growth. The debate between activists and nonactivists revolved around three further issues: differing beliefs in the inherent stability of private spend- ing, differing beliefs in the potency of price flexibility as an automatic self-correcting force to offset the impact of instability in spending, and differing degrees of trust or distrust in the feasibility of stabilizing gov- ernment policy actions. The fiscal-monetary and activist-nonactivist de- bates revolved around logically separate sets of issues. It would have been possible, for instance, to believe that monetary policy was potent and fiscal policy impotent to control aggregate demand, and yet still be in favor of activist monetary policy intervention. Nevertheless, Ameri- can economists tended to coalesce around either a fiscal-activist or mon- etary-nonactivist position, with the adjective "Keynesian" often applied to the first group and "monetarist" to the second. Because they tended to believe in the potency both of money's impact on spending and of price flexibility as an automatic stabilizing mechanism, monetarists tended to put more emphasis than Keynesians on variations in monetary growth as the most important cause of variations in the inflation rate, as summarized in Milton Friedman's famous dictum that "inflation is always and everywhere a monetary phenomenon" (1963). During most of the period before 1973 the intellectual tide shifted in a monetarist direction, both toward a belief in the potency of money and in the defects of policy activism. But since 1973 the advent of supply shocks as a major destabilizing force has caused the monetarist 103 Postwar Macroeconomics: The Evolution of Events and Ideas tide to ebb. Supply shocks not only erode the case for the monetarist "rule" that money should grow at a constant rate, but they also open up a new role for fiscal policy in the form of cost-oriented changes in taxes and subsidies to counteract the effect of supply shocks on the overall price level. One element of the monetarist credo—distrust of government actions—remained strongly intact as the decade of the 1970s drew to a close, since the major impact of tax changes had thus far been to raise costs and prices and aggravate economic instability. A review of the interaction between macroeconomic events and ideas over the 1947-79 era can be organized either by topic or by chrono- logical period. This paper begins by comparing the behavior of impor- tant aggregate variables across four subperiods of the postwar era in order to identify the major changes that call for an explanation and that have been the source of changing ideas and doctrines. Subsequently the four subperiods (1947-57, 1957-67, 1967-73, and 1973-79) are ex- amined in more detail. For each interval we identify the economic ideas about which there was a consensus at the beginning of the period, then examine major economic events and trace the impact of unexpected changes on the evolution of theory, policy, and private behavior. We regularly take advantage of historical hindsight by forming judgments on policy mistakes and the desirability of alternative policy actions. 2.2 Essential Features of the Postwar Era The most important features of the postwar era are well known. In contrast to the century before World War II, the postwar economy has been characterized by much less instability in real output and unemploy- ment together with a tendency toward chronic and persistent inflation. The growth of aggregate demand has been both faster and more stable during the postwar years, with no instance after 1949 in which annual nominal GNP growth actually declined. On the supply side, the respon- siveness of prices to fluctuations in nominal GNP growth has gradually diminished (Cagan 1975), and price movements have more and more exhibited sluggish and inertia-dominated behavior that inhibits policy- makers from ending inflation through restrictive demand-management policies. Although the willingness of Americans to accept continuing inflation might seem astonishing to a visitor from earlier eras, the domi- nance of decentralized nonsynchronized wage-setting institutions has given households and firms every incentive to protect themselves against inflation rather than take unilateral action to stop inflation. 2.2.1 The Demand Side Major features of the postwar era can be traced with the aid of table 2.1, which compares growth rates and ratios of important economic aggregates across seven subperiods spanning the interval between 1923 VO l-H «O O t""j ^ ON i—c O fj 00 00 ON ON oo i—i O i—• >O ro <S c> r^ vovoo^"!—i vo Omvo O ^^ t^vo»—i oo oo ^5 fn 0*^ t*^ ^f ^* en ^^ m m o i^ c^ o oo rj o h ON vo-^-oo rt ""JO wi m N q ON t^ VO T-H SO >-»" t>-00ON00ON rr\ O IT) O V} *"^00 >^j W N O\ vo 0s! m m c^ ^* m ON VO m m co m ^^ fo c^ ON VO ^^ co oo co co ON ^O t*^ ^^* ^^i ^^ ^^ ON *O i—' CS CN T-H fS ON i^H i-H fS {S f^ O CN i—' M t-; ON O\ ^ 00 H a T? oovdo ON t"» & «—' ^ <au g p ON ON O 00 ON 00 rn ^H ro lo a* c> -H" ^H >• ON v" 4» T-H ^J1 Q 13 | "* ON ON i-( © co CM ON ON e §^ c a 6o o i> S S I 0 8 3 C -S •Si "M"S 9 g ..>.7 ^3 ZZ« 2 "u Z, O 3 C S« h <u o o ^ s C u -*J i—^ c^ Si S > 0 Q " • *** a D a CO © CO »-J Tf ON 00 CO Vt ON ON ON *•* ro <o i-H ON VO © VC T-I t~ w rl co as rf ON ON 00 d « © © -I W N H ON Tf I*; © rl r^ oo ON © C4 ^"i-5 ^ CS tS 00 q CO q t 00 3N r- VO © co v-i ON M3 ©' r-1vo c 00 »-i r-; vq i^ © •* ON (S 00 so q ON VO o oo O\ ON r4 ts ri © ON -H cvj oq ^ r~; -H 00 00 O 4) ^) 2 o n fl 106 Robert J.
Load more

Recommended publications
  • From Chronic Inflation to Hyperlnflation
    j From chronic inflation to hyperlnflation André Lara Resende Swnmary: 1. Introduction; 2. Moderllte inflation; 3. C1ronic intlation; 4. Feuibility of padua1ism; S. Hyperinflation. 1. Introductlon Phenomena that are essentially different in cause, consequence and therapy are often discussed under the generic name oí inflation. This is certain1y one oí the reasons behind the difficulty in understanding chronic inflationary processes and consequently in reaching some consensus as to the remedy. A triple classification oí the phenomena oí generalized price increases as moderate inflation, cronic inflation, and finally hyperinflation offers some help in understanding the numerous íacets of inflationary processes. 2. Moderate Inflatlon Moderate inflation is a rise in the general price levei provoked by excess oí demand, which appears most intensely in the [mal stage oí ecónomic cycles. Prices are pressured si­ multaneously by lower inventories leveis and the approach oí the limits oí installed capaci­ ty. The increase in prices is followed by higher wages in a tighter labor market. This is the phenomenon analyzed in the macroeconomics textbooks oí the 60s and 70s and synthesized in the Phillips Curve. The hegemony of Keynesian ideas on the control oí aggregate demand - as a way to avoid the deep, prolonged recessions observed in the first half of the century - introduced an inflationary bias which appeared with greater or less intensity in the industrialized coun­ tries after the 60s. Milton Friedman and the macroeconomic school oí the University oí Chi­ cago were isolated voices in criticizing the optimism with respect to the possibilities oí ag­ gregate demand management. Their theses were confrrmed by the empirical evidence oí the 60s and 70s.
    [Show full text]
  • Download (Pdf)
    RELEASE DATE: On delivery: September 25, 1965 - Philadelphia October 2, 1965 - Los Angeles FORCES OF INFLATION AND DEFLATION By Karl R. Bopp, President Federal Reserve Bank of Philadelphia Before the Eastern and Western C.L.U. Educational Forums and Conferment Exercises Sponsored by the American College of Life Underwriters and the American Society of Chartered Life Underwriters 10:00 a.m. to 12:30 p.m., on Saturday, September 25, 1965, in Philadelphia, Pennsylvania, and Saturday, October 2, 1965, in Los Angeles, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis FORCES OF INFLATION AND DEFLATION By Karl R. Bopp Among the reasons that Dave Gregg asked me to discuss Forces of Inflation and Deflation with you are, first, that the balance of these forces is of enormous importance to all of us and particularly to life underwriters who deal in long-term money contracts; and, second, because there is a wide­ spread view that the economy of the United States suffers from chronic long­ term inflation. It is for this latter reason, incidentally, that I shall concentrate on inflation although the consequences of severe deflation are even more devastating. More specifically, I want to talk about what inflation is and what damage it can cause in an economy such as ours. Then I want to outline some of the causes of inflation. Finally, I should like to look at the problem of price stability in the context of our other economic goals and comment briefly on the recent behavior and outlook for prices. What, then, is inflation and what sort of damage can it cause? Before discussing what inflation is, I should like to say what it is not.
    [Show full text]
  • Exploring the Mechanics of Chronic Inflation and Hyperinflation
    SPRINGER BRIEFS IN ECONOMICS Fernando de Holanda Barbosa Exploring the Mechanics of Chronic In ation and Hyperin ation 123 SpringerBriefs in Economics More information about this series at http://www.springer.com/series/8876 Fernando de Holanda Barbosa Exploring the Mechanics of Chronic Inflation and Hyperinflation 123 Fernando de Holanda Barbosa Professor of Economics Getulio Vargas Foundation Graduate School of Economics (EPGE/FGV) Rio de Janeiro, Rio de Janeiro Brazil ISSN 2191-5504 ISSN 2191-5512 (electronic) SpringerBriefs in Economics ISBN 978-3-319-44511-3 ISBN 978-3-319-44512-0 (eBook) DOI 10.1007/978-3-319-44512-0 Library of Congress Control Number: 2016951721 © The Author(s) 2017 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made.
    [Show full text]
  • BIS Working Papers the Liquidation of Government Debt
    BIS Working Papers No 363 The Liquidation of Government Debt by Carmen M. Reinhart and M. Belen Sbrancia, Discussion Comments by Ignazio Visco and Alan Taylor Monetary and Economic Department November 2011 JEL classification: E2, E3, E6, F3, F4, H6, N10 Keywords: public debt, deleveraging, financial repression, inflation, interest rates BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2011. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISBN 1682-7678 (online) Foreword On 23–24 June 2011, the BIS held its Tenth Annual Conference, on “Fiscal policy and its implications for monetary and financial stability” in Lucerne, Switzerland. The event brought together senior representatives of central banks and academic institutions who exchanged views on this topic. The papers presented at the conference and the discussants’ comments are released as BIS Working Papers 361 to 365. A forthcoming BIS Paper will contain the opening address of Stephen Cecchetti (Economic Adviser, BIS), a keynote address from Martin Feldstein, and the contributions of the policy panel on “Fiscal policy sustainability and implications for monetary and financial stability”. The participants in the policy panel discussion, chaired by Jaime Caruana (General Manager, BIS), were José De Gregorio (Bank of Chile), Peter Diamond (Massachussets Institute of Technology) and Peter Praet (European Central Bank).
    [Show full text]
  • Is There Space for Political Opportunism?
    Prqh|0Edvhg yv1 H{fkdqjh0Udwh0Edvhg Vwdelol}dwlrq= Lv wkhuh Vsdfh iru Srolwlfdo RssruwxqlvpBW Dul Dlvhq XFOD Rfwrehu 5335 Devwudfw Lq uhvsrqvh wr wkh kljk dqg fkurqlf lq dwlrq wkdw kdv sodjxhg wkh ghyhorslqj zruog vlqfh wkh 4<;3*v/ frxqwulhv dgrswhg glhuhqw vwdelol}dwlrq srolflhv1 Krzhyhu/ wr zkdw h{whqw wkhvh vwdelol}dwlrq surjudpv zhuh ghvljqhg iru srolwlfdo udwkhu wkdq hfrqrplf prwlydwlrqv lv qrw fohdu1 Qru lv lw nqrzq zkhwkhu dqg wr zkdw ghjuhh srolf|0pdnhuv pd| wdnh dgydqwdjh ri wkh frqvxpswlrq f|fohv ghulyhg iurp wkh glhuhqw vwdelol}dwlrq vwudwhjlhv lq rughu wr ixuwkhu wkhlu srolwlfdo fduhhu1 Vlqfh lq fkurqlf lq dwlrq frxqwulhv/ h{fkdqjh0udwh0edvhg vwdelol}dwlrqv fuhdwh dq lqlwldo frqvxpswlrq errp iroorzhg e| d frqwudfwlrq zkhuhdv prqh|0edvhg vwdelol}dwlrqv jhqhudwh d frqvxpswlrq exvw iroorzhg e| d uhfryhu|/ srolf|0pdnhuv pd| wdnh lqwr dffrxqw wkh wlplqj ri hohfwlrqv zkhq gh0 whuplqlqj wkh qrplqdo dqfkru iru vwdelol}dwlrq1 Wklv sdshu qgv vwurqj hylghqfh wkdw wkh fkrlfh ri qrplqdo dqfkru wr vwdelol}h lq dwlrq ghshqgv rq wkh hohfwlrq f|foh1 Lq sduwlfxodu/ h{fkdqjh0udwh0edvhg vwdelol}dwlrqv duh rq dyhudjh odxqfkhg ehiruh hohfwlrqv zkloh prqh|0edvhg vwdelol}dwlrqv duh vhw diwhu wkhp/ lpso|lqj wkh h{lvwhqfh ri srolw0 lfdo rssruwxqlvp lq wkh fkrlfh ri vwdelol}dwlrq dqfkru1 Wkh hpslulfdo hvwlpdwhv duh rewdlqhg wkurxjk wkh xvh ri idluo| vlpsoh hfrqrphwulf prghov edvhg rq d vdpsoh ri 67 ixoo|0 hgjhg vwdelol}dwlrq hslvrghv lq 44 frxqwulhv zlwk kljk dqg fkurqlf lq dwlrq1 Wkh uhvxowv duh urexvw wr glhuhqw prgho vshflfdwlrqv1 Wklv sdshu frqwulexwhv
    [Show full text]
  • FISCAL POLICY and INFLATION Chronic Inflation Has Been The
    FISCAL POLICY AND INFLATION W. Fred Woods Assistant Deputy Director, SEA-Extension, USDA Chronic inflation has been the outstanding feature of the United States economy for more than a decade. It is our foremost economic ill as we approach the 1980s. Inflation has decimated consumer pur- chasing power, inhibited business investment, and weakened our export competitiveness. Since last December, consumer prices have risen at an annual rate of 131/2 percent, a sharp acceleration from the 9 percent of 1978, and almost double the 1977 inflation rate. Earlier this year, a major element in inflation was the rise in food prices. Bad weather and strikes pushed the food component of the Consumer Price Index to a 20 percent annual rate of increase. But increasingly inflation has come from rising energy prices. In January and February of this year, some 30 percent of the in- crease in consumer prices resulted from the rise in food prices. Only 10 percent was attributable to increased energy costs. By May, the proportions were exactly reversed. Since the beginning of 1979, energy product prices at retail have gone up at about a 40 percent annual rate. This is more than three times faster than the rest of the items in the Consumer Price Index. This year's inflation has stemmed in large degree from forces not directly related to current levels of demand, but rather from those forces which were unpredictable and over which we had little if any control. The Development of Chronic Inflation Let's look away from the present situation to the beginnings of our era of chronic inflation.
    [Show full text]
  • Long Memory Processes and Chronic Inflation
    IMF Staff Papers Vol. 41, No. 3 (September 1994) © 1994 International Monetary Fund Long Memory Processes and Chronic Inflation Detecting Homogeneous Components in a Linear Rational Expectations Model FABIO SCACCIAVILLANI * This paper is an empirical study of the links between monetary variables and inflation based on Cagan's equation and its rational expectations solution, when the forcing variable is a fractionally integrated process. As demonstrated by Hamilton and Whiteman, the existence of bubbles and other extraneous influences can be detected only by verifying the differ- ence in the order of integration between the monetary base and the price level series. This paper shows that a test based on fractional differenc- ing overcomes Evans' critique and that chronic inflation is essentially a monetary phenomenon caused by fiscal imbalance. [JEL C22, E31, E58] T^HE IDEA that increases in consumer price index may not reflect JL movements in fundamentals is hardly new. The idea, in essence, was already contained in Cagan (1956) and the problem of the non- uniqueness of equilibrium in a dynamic monetary economy has surfaced since Sargent and Wallace (1973). Brock (1974) undertook a comprehen- sive treatment of stable and unstable solutions in models of intertemporal optimization with real money balances in the utility function.1 However, *I greatly benefited from conversations with Robert Flood, Leonardo Bartolini, and Peter Clark. In addition, I wish to thank Fallaw Sowell for his estimation software and Mark Taylor for the suggestions and data that he pro- vided. Andrea Malagoli wrote the maximization code used in the estimation software, which is copyrighted by the University of Chicago Department of Astrophysics.
    [Show full text]
  • FROM CHRONIC INFLATION to CHRONIC DEFLATION Focusing on Expectations and Liquidity Disarray Since WWII
    Draft: May 29, 2016 Comments appreciated FROM CHRONIC INFLATION TO CHRONIC DEFLATION Focusing on Expectations and Liquidity Disarray Since WWII Guillermo Calvo1 Columbia University www.columbia.edu/~gc2286 Abstract. The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WWII, with special emphasis on Emerging Market economies to (2) chronic deflation and related phenomena, e.g., liquidity crunch and Sudden Stop that got exacerbated after the 2008 Lehman crisis. The discussion highlights the importance of expectations and liquidity, and warns about the risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great Recession. Liquidity disarray, in particular, makes it evident that the international monetary order calls for greater monetary policy coordination, which policymakers seem reluctant or unable to set up, except under duress. I. Introduction. The organizers of this conference have asked me to distill in a few pages my experience with macroeconomics, focusing on issues that are relevant for policymaking. After several false starts, I concluded that I could better serve the objective if I identified a few theoretical topics that helped in the discussion of critical policy issues during the period covered. Rational Expectations (RE) stands up, given its role in the flourishing of macroeconomics since the 1970s. Whether or not one endorses its relevance for positive theory, RE has proved to be immensely useful to sort out analytical issues and offer useful insights on applications. Like the Modigliani-Miller theorem or Ricardian equivalence, the RE insights provide benchmarks that shed light even on cases in which RE do not hold.
    [Show full text]
  • FIGHTING CHRONIC INFLATION with INTEREST RATES Cutting a Hydra's Heads with a Swiss Army Knife?
    COMMENTS APPRECIATED October 22, 2017 FIGHTING CHRONIC INFLATION WITH INTEREST RATES Cutting a Hydra's Heads with a Swiss Army Knife? Guillermo Calvo Columbia University www.columbia.edu/~gc2286 Abstract. Interest rates do not have a good name. They seem effective in guiding monetary variables in normal circumstances, but have failed badly under duress. For instance, high interest rates have failed to stop inflation as they seriously jeopardized public and private sectors' balance sheets. Balance-sheet issues are well known and thus will be mostly ignored here. Instead, the paper will focus on equally important issues that besiege Emerging Market economies, EMs, namely, (a) imperfect credibility, (b) price inertia, and (3) shallow domestic capital markets, in the context of Interest-Rate-Based, IRB, stabilization programs, subject to Taylor- type interest rules—which have received much less attention than non-IRB programs. This void deserves filling because several EMs that do not belong to a currency union have embraced interest rates as the instrument of choice, with the encouragement of the IMF. This paper shows that IRB plans tend to be associated inter alia with recession and occasional currency overvaluation, thus resembling money-based plans (even though money is endogenous!). Moreover, strictly following a Taylor rule could actually foster the existence of anticipated step- devaluations under perfect capital mobility (!), and give rise to multiple equilibria. This strengthens the view that IRB plans should rely on complementary nominal anchors (e.g., the exchange rate), and make sure that the private sector does not take the mix of anchors as a signal of central bankers' incompetence or irrelevance.
    [Show full text]
  • The Subprime Lending Disaster and the Threat to the Broader Economy
    S. HRG. 110–250 EVOLUTION OF AN ECONOMIC CRISIS?: THE SUBPRIME LENDING DISASTER AND THE THREAT TO THE BROADER ECONOMY HEARING BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES ONE HUNDRED TENTH CONGRESS FIRST SESSION SEPTEMBER 19, 2007 Printed for the use of the Joint Economic Committee ( U.S. GOVERNMENT PRINTING OFFICE 38–426 PDF WASHINGTON : 2008 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate 11-MAY-2000 13:50 Jan 22, 2008 Jkt 038426 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 C:\JEC\38426.TXT CELINA PsN: CELINA JOINT ECONOMIC COMMITTEE [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] SENATE HOUSE OF REPRESENTATIVES CHARLES E. SCHUMER, New York, Chairman CAROLYN B. MALONEY, New York, Vice Chair EDWARD M. KENNEDY, Massachusetts MAURICE D. HINCHEY, New York JEFF BINGAMAN, New Mexico BARON P. HILL, Indiana AMY KLOBUCHAR, Minnesota LORETTA SANCHEZ, California ROBERT P. CASEY, JR., Pennsylvania ELIJAH E. CUMMINGS, Maryland JIM WEBB, Virginia LLOYD DOGGETT, Texas SAM BROWNBACK, Kansas JIM SAXTON, New Jersey, Ranking Minority JOHN E. SUNUNU, New Hampshire KEVIN BRADY, Texas JIM DEMINT, South Carolina PHIL ENGLISH, Pennsylvania ROBERT F. BENNETT, Utah RON PAUL, Texas MICHAEL LASKAWY, Executive Director CHRISTOPHER J. FRENZE, Republican Staff Director (II) VerDate 11-MAY-2000 13:50 Jan 22, 2008 Jkt 038426 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 C:\JEC\38426.TXT CELINA PsN: CELINA C O N T E N T S OPENING STATEMENT OF MEMBERS Hon.
    [Show full text]
  • The Case of Chile
    WORKING PAPER The Case of Chile Rodrigo Caputo and Diego Saravia JANUARY 2019 A Program of 1126 E. 59th St, Chicago, IL 60637 Main: 773.702.5599 bfi.uchicago.edu The Monetary and Fiscal History of Chile, 1960–2016 Rodrigo Caputo Diego Saravia CESS, Oxford University-USACH Central Bank of Chile Abstract Chile has experienced deep structural changes in the last fifty years. In the 1970s, a massive increase in government spending, not financed by an increase in taxes or debt, induced high and unpredictable inflation. Price stability was achieved in the early 1980s after a fixed exchange rate regime was adopted. This regime, however, generated a sharp real exchange rate appreciation that exacerbated the external imbalances of the economy. The regime was abandoned and nominal devaluations took place. This generated the collapse of the financial system, which had to be rescued by the government. There was no debt default, but in order to service the public debt, the fiscal authority had to generate surpluses. Since 1990, this was a systematic policy followed by almost all administrations and helped to achieve two different but related goals. It contributed to reducing the fiscal debt and enabled the central bank to pursue an independent monetary policy aimed at reducing inflation. We are grateful to Jorge Alamos, Luis Felipe Céspedes, Jos´e D´ıaz, Pablo Garc´ıa, Alfonso Irarr´azabal, Jos´e Matus, Juan Pablo Medina, Juan Pablo Nicolini, Eric Parrado, Claudio Soto, Jaime Troncoso, Rodrigo Valdés, Gert Wagner, and seminar participants at the Central Bank of Chile, the University of Chicago, the University of Barcelona, LACEA 2017, the BFI–University of Chicago 2017 Conference, the BFI–Central Bank of Chile 2008 Conference, and the BFI–IDB Conference in 2008 for helpful comments and discussions.
    [Show full text]
  • Supply and Inflation
    CAVE.6607.cp26.p543-570 6/6/06 1:31 PM Page 543 CHAPTER 26 Supply and Inflation hapters 19 and 20 made the extreme classical assumption that output is fixed at potential output. Other chapters have made the opposite extreme assumption, Cthat supply is infinitely elastic at a given price level. The latter assumption is rel- atively realistic in the very short run.The former assumption is realistic in the long run. But for many policy-making questions, we are interested in an intermediate time span. What happens over the first year, for example? In this chapter we explore the supply side of the economy. Relative to earlier chap- ters we introduce two new variables: the wage rate, and expectations regarding future inflation.We use the model to examine such questions as the advisability of wage index- ation, central bank independence, and monetary unions. The last section of the chapter considers how countries should choose their exchange rate regime.These choices influ- ence whether a country will be prone to inflation. 26.1 The Aggregate Supply Relationship If all wages and prices are perfectly flexible, a 10 percent monetary expansion is reflected in a 10 percent increase in prices, with no effect on real output. If wages and prices are fixed, an expansion of demand instead goes into higher output. This section and the next consider a more complete range of possible aggregate supply relationships, showing how changes in monetary policy are reflected in both output and prices. To begin, we review the aggregate demand relationship familiar from introductory macroeconomics.
    [Show full text]