宏观经济学 教案Chapter18.docx

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1、CHAPTER 18POLICYChapter Outline Policy lags Automatic stabilizers Uncertainties and expectations Gradualist versus cold turkey policies Policy instruments, indicators, and targets Fine tuning the economy Rules versus discretion Real GDP, nominal GDP, and inflation targeting Dynamic inconsistency The

2、 independence of the central bankChanges from the Previous EditionThe theoretical content of Chapter 18 remains largely intact but the material has been updated, especially Table 1 in History Speaks Box 18-2 and Figure 1 in History Speaks Box 18-3.Introduction to the MaterialIn deciding what type of

3、 stabilization policy to implement in response to economic disturbances, policy makers face several major difficulties, including: It is not always immediately clear whether a disturbance is transitory or persistent. The process by which policies affect the economy always entails some delays or lags

4、. There is considerable uncertainty about the structure of the economy and how strongly it will respond to a particular policy action. The outcome of any policy change depends on consumers9 and firms* expectations and the private sectors reactions to the policy action, which are difficult to predict

5、. Policy makers must choose between a sudden or gradual policy change and how more flexibility in implementing a policy change will affect their credibility.The process by which policy actions affect the economy can be divided into two steps, the inside lag and the outside lag. The inside lag is the

6、 time period it takes to implement a policy action after an economic disturbance occurs. It is divided into three parts: the recognition lag, which is the time it takes for policy makers to realize that a disturbance has occurred and that a policy response is warranted;the decision lag, which is the

7、 time it takes to decide on the most desirable policy response after a disturbance is recognized; the action lag, which is the time it takes to actually implement the policy measure.are about the effects of the policy. If a disturbance is small and likely to be transitory, it may be best to do nothi

8、ng, because any measure you take is likely to have its effect after the economy has recovered and you may only further aggravate the problem. On the other hand, if the effects of the disturbance are likely to be longer lasting, you may want to offset the effects with an appropriate policy measure.2

9、.a. The inside lag is the time it takes to recognize that an economic disturbance has occurred and to implement the most appropriate policy action to address it.3 .b. The inside lag is divided into three parts. First, there is the recognition lag, that is, the time it takes for policy makers to real

10、ize that a disturbance has occurred and a policy response is warranted. Second, there is the decision lag, that is, the time it takes to decide on the most desirable policy response to the disturbance. Finally, there is the action lag, that is, the time it takes to actually implement the policy meas

11、ure.4 .c. The inside lag is shorter for monetary policy than for fiscal policy since the FOMC meets on a regular basis to discuss and implement monetary policy. Fiscal policy, on the other hand, has to be initiated and passed by both houses of Congress and this can be a lengthy process. The exceptio

12、ns are the automatic stabilizers, but they only work well for small and transitory disturbances.4.6. Automatic stabilizers are built into our economic system and therefore have no inside lag. In other words, they are endogenous and function without specific government intervention. Examples are the

13、income tax system, the welfare system, unemployment insurance, and the Social Security system. In each of these cases, the magnitude of an output change following an economic disturbance has been mitigated.3a The outside lag is the time it takes for a specific policy action to have its full impact o

14、n the economy.3b Generally, the outside lag is a distributed lag with a smaller immediate effect and a larger overall effect over a longer time period. The multiplier effect is spread over time, since aggregate demand responds slowly to any policy change.5 .c. The outside lag is longer for monetary

15、policy since monetary policy actions affect short-term interest rates most directly, while aggregate demand depends heavily on lagged values of income, interest rates, and other economic variables. A change in government spending, however, immediately affects aggregate demand, and is then followed b

16、y a multiplier effect.6 . Fiscal policy has a smaller outside lag, but a significant inside lag. Monetary policy, on the other hand has a smaller inside lag and a longer outside lag. Therefore large open marketoperations should be undertaken to get an immediate effect, but they should be partially r

17、eversed over time to avoid a large long-run effect. If the disturbance is very small and only transitory, the best approach may be not to undertake any policy change at all.5.a. An econometric model is a statistical description of all or part of the economy. It consists of a set of equations that ar

18、e based on past economic behavior.5b Econometric models are generally used to forecast the behavior of the economy and the effects of alternative policy measures.5c There is considerable uncertainty about how well econometric models actually represent the workings of the economy. There is also great

19、 uncertainty about the expectations of firms and consumers and their reactions to a particular policy change. Any policy is bound to fail if the information on which it was based is poor.6. The answer to this question is student specific. The main difficulties of stabilization policy arise from thre

20、e sources. First, policy always works with lags. Second, the outcome of any policy depends on the way the private sector forms expectations and how those expectations affect the publics behavior. Third, there is considerable uncertainty about the structure of the economy and the type of disturbance

21、that may have occurred.It can be argued that a monetary policy rule would greatly reduce uncertainty about the Feds policy responses. If the government behaved in a consistent way, the private sector would also behave more consistently and economic fluctuations could be greatly reduced. A monetary g

22、rowth rule would also reduce any political pressure the administration might exert on the Fed. It is often initially unclear whether a disturbance is temporary or persistent and a monetary policy rule would prevent policy mistakes in cases where the disturbance is, in fact, temporary. If active mone

23、tary policy is applied to a temporary disturbance, the lags involved will guarantee that the economy will actually be destabilized.On the other hand, the workings of the economy are not completely understood and events cannot always be predicted. Therefore it is difficult to argue for a fixed policy

24、 rule. Unanticipated large disturbances warrant an activist policy, especially if they appear to be persistent. It is also possible to construct a more activist rule, such as the Taylor rule. The Taylor rule states that that the Fed should counteract an increase in the inflation rate of 1 percent ab

25、ove the target rate by raising interest rates by 1.5 percent; but if the GDP-gap rises by 1 percent, then interest rates should be raised by 0.5 percent. Obviously, because of the long lags for monetary policy, any monetary growth rule will work much better in the long run than in the short run.Fisc

26、al policy rules may make more sense than monetary policy rules, since fiscal policy has a longer inside lag but a shorter outside lag. In a way, automatic stabilizers, although generally not considered “rules J already provide some stability without any inside lag. Many of the arguments against mone

27、tary policy rules are also valid for fiscal policy rules and many economists oppose them. The frequently proposed constitutional amendment requiring anannually balanced budget is an example of a fiscal policy rule. There are significant problems associated with such an amendment, since it would grea

28、tly limit the governments ability to undertake active fiscal stabilization policy.7. The arguments for a constant monetary growth rule are based on the quantity theory of money equation, that is, MV = PY. From this equation we can derive the equation%AP = %AM - %AY + %AV.If the long-run trend of rea

29、l output (%AY) and the long-run trend of velocity (%AV) are fairly stable, and if wages and prices are sufficiently flexible, then a constant monetary growth rate (%AM) would ensure a constant rate of inflation, that is, a constant rate of change in the price level (%AP). Also, since monetary policy

30、 has a long outside lag, active monetary policy may actually be more destabilizing than stabilizing. In addition, since we do not know exactly how the economy works or may react to specific policies, it is best to follow a rule rather than undertake actions that have uncertain outcomes. However, rul

31、es are not without problems, as they do not allow flexibility in responding to major disturbances.8. Dynamic inconsistency occurs if, after having committed themselves to a specific policy action designed to achieve a long-run objective, policy makers find themselves in a situation where it seems ad

32、vantageous to abandon their original policy temporarily in order to achieve a short-run goal, even though this action may impede their long-run objective. Achieving full employment at a low inflation rate may be a desirable policy goal; however, it may be difficult to accomplish, since anti-inflatio

33、nary policies generally increase the unemployment rate, at least in the short run. Any attempt to lower a high unemployment rate is likely to impede efforts to keep inflation low.9. Real GDP targeting is the best option if the primary policy goal of monetary policy is to achieve full employment. How

34、ever, full employment combined with a low inflation rate can only be achieved if policy makers forecast potential GDP correctly. Real GDP targeting bears the greater risk that the secondary goal of achieving a low inflation rate will be missed. If the rate at which potential GDP grows is overestimat

35、ed, policy makers may stimulate the economy too much. In this case, they will not be successful in achieving price stability. By targeting nominal GDP, the central bank creates a policy tradeoff between inflation and unemployment. If the rate at which potential GDP grows is overestimated and policy

36、makers stimulate the economy too much, we will get less growth but also less inflation than under real GDP targeting. Choosing the most effective targeting approach depends greatly on how steep or flat the Phillips curve is perceived to be.Technical Problems1. If actual GDP is expected to be $40 bil

37、lion below the full-employment level and the size of the government spending multiplier is 2, then government spending should be increased by $20 billion over its current level. For the next period, when actual GDP is expected to be $20 billion below potential, government spending should be cut by $

38、10 billion from its new level, that is, to $10 billion over its original level. In period three, when actual GDP is expected to be at its full-employment level, the level of government spending should again be cut by $10 billion from the last periods level to bring it back to the original level of P

39、eriod 0.2a. If there is a one-period outside lag for government spending, nothing can be done to close the current GDP-gap. The government should decide to spend $10 billion more for the next period and reduce spending again to its original level after that.2.b.GDPpotential GDPGraph IGDPpotential GD

40、P0time 0GDP with fiscal policytimeGDP without fiscal policyGraph I above shows the path of GDP for Problem 1 with no outside lag and Graph II below shows the path of GDP for problem 2.a. with a one-period outside lag. In each of the graphs the path of actual GDP is shown, first assuming that no poli

41、cy action takes place and then assuming that the policies proposed in Problems 1 and 2a are undertaken.GDPpotential GDPGraph IIGDPpotential GDPtimeGDP with fiscal policytimeGDP without fiscal policy3 .a. Since the government spending multiplier for the first period is 1, the level of government spen

42、ding must be increased by AG = $40 billion to close the GDP-gap of $40 billion. However, since the government spending multiplier in the next period for the amount spent in this period is 1.5, the effect of an increase in government spending by $40 billion in the first period would be an increase in

43、 GDP by $60 billion in the second period.3b. A GDP-gap of $20 billion is expected in the second period. However, as we saw in 3a, GDP will increase by $60 billion in the second period if the government increases spending by $40 billion in the first period. Therefore, the government has to reduce spe

44、nding in the second period by $40 billion, that is, back to its original level, since the multiplier for a spending change in the same period is 1.4 .c. In this problem, fiscal policy has an outside lag. This means that the effect of an increase in government spending is felt both in the period in w

45、hich the spending increase takes place and, to an even larger degree, in the following period. The increase in government spending needed to close the GDP-gap in the first period is guaranteed to overshoot the desired goal in the next period. Thus the government will be forced to reverse its increas

46、e in spending to the original level in the second period to offset the destabilizing effect. In a case like this, the government has to be much more active in its fiscal policy than in a situation where no distributed lag exists.5 . If there is uncertainty about the size of the fiscal policy multipl

47、ier, fiscal policy becomes much more complicated. If the multiplier is 1, an increase in government spending by $40 billion will close the GDP-gap in the first period. If the multiplier is 2.5, we will overshoot potential GDP by $60 billion. An increase in spending by 40/2,5 = $16 billion is optimal

48、 if the multiplier is 2.5. Therefore a cautious government will probably increase spending by no more than $16 billion in the first period, and then reduce the level of spending by $8 billion in the next period ($8 billion above the original level). This policy action is designed to close the GDP-ga

49、p to some degree over the first two periods while never overshooting potential GDP. In Period 3 we will again be back at the full-employment level. The extent to which a less cautious government might exceed these suggested spending increases depends largely on that governments level of concern about unemployment versus inflation.6 . To follow an established policy rule, the