Some Political Economy of Monetary Rules
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Campaign for Liberty — with All Due Respect Mr. President
Campaign For Liberty — With all due respect Mr. President http://www.campaignforliberty.com/blog.php?view=9636 "There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy." — PRESIDENT-ELECT BARACK OBAMA, JANUARY 9 , 2009 With all due respect Mr. President, that is not true. Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth. Burton Abrams, Univ. of Delaware Marek Kolar, Delta College Douglas Adie, Ohio University Roger Koppl, Fairleigh Dickinson University Ryan Amacher, Univ. of Texas at Arlington Kishore Kulkarni, Metropolitan State College J.J. Arias, Georgia College & State University of Denver Howard Baetjer, Jr., Towson University Deepak Lal, UCLA Stacie Beck, Univ. of Delaware George Langelett, South Dakota State Don Bellante, Univ. of South Florida University James Bennett, George Mason University James Larriviere, Spring Hill College Bruce Benson, Florida State University Robert Lawson, Auburn University Sanjai Bhagat, Univ. -
Chapter 11 - Fiscal Policy
MACROECONOMICS EXAM REVIEW CHAPTERS 11 THROUGH 16 AND 18 Key Terms and Concepts to Know CHAPTER 11 - FISCAL POLICY I. Theory of Fiscal Policy Fiscal Policy is the use of government purchases, transfer payments, taxes, and borrowing to affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. A. Fiscal Policy Tools • Automatic stabilizers: Federal budget revenue and spending programs that automatically adjust with the ups and downs of the economy to stabilize disposable income. • Discretionary fiscal policy: Deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price stability, and economic growth. • Changes in Government Purchases: At any given price level, an increase in government purchases or transfer payments increases real GDP demanded. For a given price level, assuming only consumption varies with income: o Change in real GDP = change in government spending × 1 / (1 −MPC) other things constant. o Simple Spending Multiplier = 1 / (1 − MPC) • Changes in Net Taxes: A decrease (increase) in net taxes increases (decreases) disposable income at each level of real GDP, so consumption increases (decreases). The change in real GDP demanded is equal to the resulting shift of the aggregate expenditure line times the simple spending multiplier. o Change in real GDP = (−MPC × change in NT) × 1 / (1−MPC) or simplified, o Change in real GDP = change in NT × −MPC/(1−MPC) o Simple tax multiplier = −MPC / (1−MPC) B. Discretionary Fiscal Policy to Close a Recessionary Gap Expansionary fiscal policy, such as an increase in government purchases, a decrease in net taxes, or a combination of the two: • Could sufficiently increase aggregate demand to return the economy to its potential output. -
Anticipation of Future Consumption: a Monetary Perspective
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Faria, Joao Ricardo; McAdam, Peter Working Paper Anticipation of future consumption: a monetary perspective ECB Working Paper, No. 1448 Provided in Cooperation with: European Central Bank (ECB) Suggested Citation: Faria, Joao Ricardo; McAdam, Peter (2012) : Anticipation of future consumption: a monetary perspective, ECB Working Paper, No. 1448, European Central Bank (ECB), Frankfurt a. M. This Version is available at: http://hdl.handle.net/10419/153881 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu WORKING PAPER SERIES NO 1448 / JULY 2012 ANTICIPATION OF FUTURE CONSUMPTION A MONETARY PERSPECTIVE by Joao Ricardo Faria and Peter McAdam In 2012 all ECB publications feature a motif taken from the €50 banknote. -
A Conversation with Dr. Scott Sumner, June 3, 2015 Participants Summary
A conversation with Dr. Scott Sumner, June 3, 2015 Participants • Dr. Scott Sumner – Director, Program on Monetary Policy, the Mercatus Center at George Mason University (Mercatus) • Alexander Berger – Research Analyst, Open Philanthropy Project • Karl Smith – Consultant, Open Philanthropy Project Note: These notes were compiled by the Open Philanthropy Project and give an overview of the major points made by Dr. Scott Sumner. Summary The Open Philanthropy Project spoke with Dr. Sumner of Mercatus as part of its investigation into the economic and policy advocacy landscape around nominal gross domestic product (NGDP) targeting. Conversation topics included support for NGDP targeting from economists, past obstacles to implementing NGDP targeting, the value of prediction markets, and Dr. Sumner’s role at Mercatus. NGDP targeting Support for nominal GDP targeting Dr. Sumner believes that the Federal Reserve (Fed) is likely to adopt a particular monetary policy if there is consensus among economists about its effectiveness. There is now significant support for NGDP targeting from well-known economists on both the left and the right, including: • Christina Romer (University of California, Berkeley) • James Bullard (President, Federal Reserve Bank of St. Louis) • In recent remarks, Larry Summers (Harvard University) seemed to view NGDP targeting positively, though he did not explicitly endorse it • Mark Carney suggested that NGDP targeting should be considered as an option, just before he began serving as Governor of the Bank of England Dr. Sumner sees interest in NGDP targeting increasing steadily. The UK may be the country most likely to adopt NGDP targeting in the near future. Past obstacles to aDopting NGDP targeting Widely used New Keynesian economic models do not include NGDP as a variable, which makes it harder for many economists to see NGDP targeting as optimal. -
Scott Sumner
FEATURE A NEW VIEW OF THE GREAT RECESSION Scott B. Sumner argues US monetary policy has been too tight, not too easy ive years on, economists still don’t agree the ambiguity. Here’s Milton Friedman in 1998 on the causes of the financial crisis of expressing dismay that economists were confusing 2007–08. Nor do they agree on the easy and tight money in Japan: correct policy response to the subsequent Frecession. But one issue on which there is almost Low interest rates are generally a sign that universal agreement is that the financial crisis money has been tight, as in Japan; high caused the Great Recession. interest rates, that money has been easy … In this essay, I suggest that the conventional After the U.S. experience during the Great view is wrong, and that the financial crisis did not Depression, and after inflation and rising cause the recession—tight money did. This new interest rates in the 1970s and disinflation view must overcome two difficult hurdles. Most and falling interest rates in the 1980s, people think it is obvious that the financial crisis I thought the fallacy of identifying tight caused the recession, and many are incredulous money with high interest rates and easy when they hear the claim that monetary policy money with low interest rates was dead. has been contractionary in recent years. The first Apparently, old fallacies never die.1 part of the essay will explain why the conventional view is wrong; monetary policy has indeed been Many pundits claim that the Bank of Japan quite contractionary in the United States, Europe (BoJ) tried an easy money policy in the 1990s and and Japan (but not in Australia.) The second part early 2000s because nominal interest rates were will explain how people have reversed causation, low and the monetary base was growing rapidly. -
The Sub-Optimality of the Friedman Rule and the Optimum Quantity of Money
ANNALS OF ECONOMICS AND FINANCE 14-2(B), 893{930 (2013) The Sub-Optimality of the Friedman Rule and the Optimum Quantity of Money Beatrix Paal University of Texas at Austin and Bruce D. Smith Department of Economics, University of Texas, Austin TX 78712 E-mail: [email protected] According to the logic of the Friedman rule, the opportunity cost of holding money faced by private agents should equal the social cost of creating addi- tional fiat money. Thus nominal rates of interest should be zero. This logic has been shown to be correct in a number of contexts, with and without various distortions. In practice, however, economies that have confronted very low nominal rates of interest over extended periods have been viewed as performing very poorly rather than as performing very well. Examples include the U.S. during the Great Depression, or Japan during the last decade. Indeed economies experi- encing low nominal interest rates have often suffered severe and long-lasting recessions. This observation suggests that the logic of the Friedman rule needs to be reassessed. We consider the possibility that low nominal rates of interest imply that fiat money is a good asset. As a result, agents are induced to hold an excessive amount of savings in the form of money, and a sub-optimal amount of savings in other, more productive forms. Hence low nominal interest rates can lead to low rates of investment and, in an endogenous growth model, to low rates of real growth. This is a cost of following the Friedman rule. -
Populism, Economic Policies and Central Banking
Populism, Economic Policies and Central Banking Edited by Ernest Gnan and Donato Masciandaro Contributions by Itai Agur • Carola Binder • Cristina Bodea • Claudio Borio • Italo Colantone • Federico Favaretto • Ana Carolina Garriga • Stefan Gerlach • Ernest Gnan 0DVDDNL +LJDVKLMLPD 5\V]DUG .RNRV]F]\ĔVNL -RDQQD 0DFNLHZLF]à\]LDN 1LFROiV (UQHVWR Magud • Donato Masciandaro • Luljeta Minxhozi • Massimo Morelli • Francesco Passarelli • Antonio Spilimbergo • Piero Stanig • Alejandro M. Werner A joint publication with the Bocconi University DQG%$)),&$5(),1 Supported by SUERF – Société SUERF Universitaire Européenne Conference Proceedings de Recherches Financières 2020/1 Populism, Economic Policies and Central Banking POPULISM, ECONOMIC POLICIES AND CENTRAL BANKING Edited by Ernest Gnan and Donato Masciandaro Contributions by Itai Agur, Carola Binder, Cristina Bodea, Claudio Borio, Italo Colantone, Federico Favaretto, Ana Carolina Garriga, Stefan Gerlach, Ernest Gnan, Masaaki Higashijima, Ryszard Kokoszczyński, Joanna Mackiewicz-Łyziak, Nicolás Ernesto Magud, Donato Masciandaro, Luljeta Minxhozi, Massimo Morelli, Francesco Passarelli, Antonio Spilimbergo, Piero Stanig, Alejandro M. Werner A joint publication with the Bocconi University and BAFFI CAREFIN Supported by SUERF – The European Money and Finance Forum Vienna 2020 SUERF Conference Proceedings 2020/1 CIP Populism, Economic Policies and Central Banking Editors: Ernest Gnan and Donato Masciandaro Authors: Itai Agur, Carola Binder, Cristina Bodea, Claudio Borio, Italo Colantone, Ana Carolina Garriga, Stefan Gerlach, Ernest Gnan, Federico Favaretto, Masaaki Higashijima, Ryszard Kokoszczyński, Joanna Mackiewicz-Łyziak, Nicolás Ernesto Magud, Donato Masciandaro, Luljeta Minxhozi, Massimo Morelli, Francesco Passarelli, Antonio Spilimbergo, Piero Stanig, Alejandro M. Werner Keywords: Behavioural economics, Banking policy, Populism, Economic Policy, Central bank Independence, Financial Inequality, Political Economics, Political Economy, Fiscal policy, Populism, Latin America, Institutions. -
The Stance of Monetary Policy: the NGDP Gap
POLICY BRIEF The Stance of Monetary Policy: The NGDP Gap David Beckworth April 2020 (updated May 11, 2020) One of the most important questions facing the Federal Reserve (Fed) is also one of the hardest for it to answer: What is the current stance of monetary policy? The answer to this question is straightforward in theory, but is quite challenging to apply in practice. Despite many valiant efforts by central bankers, academics, and market participants, there is still a lot of uncertainty in real time about whether monetary policy is too tight, too loose, or just about right. This policy brief attempts to add some clarity to this question by providing a new measure of the stance of monetary policy. This policy brief specifically shows how to construct a benchmark growth path for nominal GDP (NGDP) where monetary policy is neither expansionary nor contractionary. Deviations of actual NGDP from this neutral level of NGDP provide a way to assess the stance of monetary policy. These deviations, called the NGDP gap, can be used by the Federal Open Market Committee (FOMC) as a cross-check on existing indicators of the stance of monetary policy. This new measure does not require knowledge of standard macroeconomic policy indicators such as r-star (the neutral real interest rate) or y-star (potential real GDP), and therefore avoids the challenges of “navigating by the stars” as outlined by Fed chair Jerome Powell.1 All it requires are some simple calculations applied to publicly available forecasts of NGDP. Despite its simplicity, the NGDP gap can be motivated from both New Keynesian and monetarist theory, and therefore can serve as a useful metric in these frameworks. -
The Case for NGDP Targeting Lessons from the Great Recession
The Case for NGDP Targeting Lessons from the Great Recession Scott Sumner 23 Great Smith Street ADAM SMITH London SW1P 3BL INSTITUTE www.adamsmith.org www.adamsmith.org The Case for NGDP Targeting Lessons from the Great Recession Scott Sumner Scott Sumner has taught economics at Bentley University for the past 27 years. He earned a BA in economics at the University of Wisconsin and a PhD at the University of Chicago. His research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. © Adam Smith Research Trust 2011 Published in the UK by ASI (Research) Limited Some rights reserved. Copyright remains with the copyright holder, but users may download, save and distribute this work in any format provided that: (1) the Adam Smith Institute is cited; (2) the URL www.adamsmith.org <http://www.adamsmith.org> is published together with a prominent copy of this notice; (3) the text is used in full without amendments (extracts may be used for criticism or review); (4) the work is not resold; and (5) a link to any online use is sent to [email protected]. The views expressed in this publication are those of the author and do not necessarily reflect those of the publisher. They have been selected for their independence and intellectual vigour, and are presented as a contribution to public debate. ISBN 1 902737 73 3 Printed in England by Grosvenor Group (Print Services) Limited, London Contents Executive Summary 5 Introduction 5 1 The advantages of NGDP targeting 6 over inflation targeting 2 NGDP targeting and the crash of 2008 9 3 Level targeting and forecast targeting 16 Executive summary The recent economic crisis has exposed important flaws with inflation targeting, particularly the form practiced by real world central banks. -
Monetary Policy Frameworks
Monetary Policy Frameworks Loretta J. Mester President and Chief Executive Officer Federal Reserve Bank of Cleveland Panel Remarks for the National Association for Business Economics and American Economic Association Session, “Coordinating Conventional and Unconventional Monetary Policies for Macroeconomic Stability” Allied Social Science Associations Annual Meeting Philadelphia, PA January 5, 2018 1 Introduction I thank George Kahn for inviting me to speak in this session. I will use my time to discuss the framework the FOMC uses for setting monetary policy and some alternative frameworks. Let me emphasize that this is a longer-run issue and not one that is of immediate concern. It lies in the realm of what economists and policymakers should have on their agendas for study given the economic developments we’ve seen over the past decade and what is expected over the coming decade. The views I’ll present are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee. The FOMC currently uses a flexible inflation-targeting framework to set monetary policy. It is briefly described in the FOMC’s statement on longer-run goals and monetary policy strategy.1 The U.S. adopted an explicit numerical inflation goal in January 2012. This is a symmetric goal of 2 percent, as measured by the year-over-year change in the price index for personal consumption expenditures, or PCE inflation. In establishing this numerical goal, the U.S. joined many other countries, including Australia, Canada, New Zealand, Sweden, and the U.K., as well as the European Central Bank, that conduct monetary policy with a goal of achieving an explicit inflation target. -
Operating Objectives for Monetary Policy
RESEARCH DISCUSSION PAPER OPERATING OBJECTIVES FOR MONETARY POLICY Malcolm Edey RDP 9007 RESEARCH DEPARTMENT RESERVE BANK OF AUSTRALIA The Discussion Paper series is intended to make the results of current economic research within the Reserve Bank available to other economists. Its aim is to present preliminary results of research so as to encourage discussion and comment. Views expressed in this paper are those of the author and not necessarily those of the Reserve Bank. Use of any results from this paper should clearly attribute the work to the author and not to the Reserve Bank of Australia. OPERATING OBJECTIVES FOR MONETARY POLICY Malcolm L. Edey* Research Discussion Paper 9007 November 1990 Research Department Reserve Bank of Australia * The views expressed herein are those of the author and do not necessarily reflect those of the Reserve Bank of Australia. Abstract This paper investigates sin1ple monetary policy rules using a theoreticalrnodel of a sn1a1l open economy. The analysis is intended to highlight two problerns in policy formulation that are of particular irnportance to Australia: instability of the money demand function, and exposure of the economy to exten1al shocks. Among the class of sin1ple rules that are considered, it is shown that nominal income targeting consistently gives the lowest short-run variability of real output. In particular, such a policy outperforms both a monetary target and a fixed exchange rate. Problems of inaccurate infonnation and recognition lags reduce the attractiveness of all targeting rules relative to the alternative of fixing the exchange rate. However, these problems do not provide grounds for a return to simple fonns of n1onetary targeting. -
'Is the Taylor Rule the Same As the Friedman Rule?'*
‘Is the Taylor Rule the same as the Friedman Rule?’z Naveen Srinivasan¤, Graduate Student, Department of Economics, Cardi¤ Business School, UK Laurian Lungu, Graduate Student, Department of Economics, Cardi¤ Business School, UK Patrick Minford, Professor of Applied Economics, Cardi¤ Business School, UK and CEPR —————————– zThe authors thank James Davidson, David Peel, and seminar participants at the University of Wales Economics Colloquium, Gregynog, June 2000. Thanks also to David Meenagh and Ruthira Naraidoo for research assistance. ¤Corresponding author. Address: Cardi¤ Business School, Cardi¤ University, Cardi¤ CF1 3EU, United Kingdom. Tel: +44 (0) 29 20876545. Fax: +44 (0) 29 20874419. Email: [email protected] 1 Abstract Our objective in this paper has been to provide more theoretically coherent micro- foundations for monetary policy rules in response to Lucas’s (1976) critique of econo- metric policy evaluation and, more importantly, to show that the Taylor rule can be derived via Friedman’s k% money supply rule. A key di¤erence with respect to the traditional IS-LM framework, is that, the aggregate decision rules evolve explicitly from optimisation by households and …rms. We conduct counterfactual historical analysis - to compare and contrast Friedman’s rule alongside Taylor’s (1993) rule. JEL classi…cations: D5, D58, E0, E5 Keywords: representative agent models; monetary policy rules ———————————————————————– Naveen Srinivasan, Graduate Student, Department of Economics, Cardi¤ Business School, UK Laurian Lungu, Graduate Student, Department of Economics, Cardi¤ Business School, UK Patrick Minford, Professor of Applied Economics, Cardi¤ Business School, UK and CEPR 2 1 Introduction Recent years have witnessed an upsurge of interest among both academic economists and central bankers alike in the topic of simple and explicit rules for conducting mon- etary policy.