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Chapter 18. Stabilization Policy
Plus pages 435-36 on the Taylor Rule
Homework page 538 1, 3a-c
Link to syllabus
Recall Fig. 14-2, p. 405. Shifts in AD and Short Run Fluctuation
The big issue is how
quickly the AS shifts
left from AS1 to AS2.
Rational Expectations
theorists say it happens
very quickly, thus
countercyclical policy
won’t change output
nor employment much
as the economy moves
from A to C.
Fig. 10-12, 10-13, pp. 292, 295. Changes in
AD
Rational expectations school argues that if government policy causes
a change in AD, and that is known, there will be an immediate
shift in SRAS, and so Y (output; therefore employment/unemployment)
will not change, as the economy goes straight from A to C.
In other words, countercyclical policy is not needed.
Fig. 18-1, p. 525. Forecasting the Recession of 1982
Milton Friedman,
1912-2006
Monetarism
Monetary Growth rule
Consumption function
(Introduced expectations into macro)
Flexible exchange rates
Leader of anti-government movement,
which we see in rejection of discretionary
policies, and preference for rules.
Monetary Growth Rule ii
Monetary
Growth Rule i
Bernanke’s testimony 11/16/05
In his first extended public appearance since President Bush nominated
him to lead the Fed, Mr. Bernanke stoutly defended his proposal to base
monetary policy on an explicit target for inflation and asserted that he
would not weaken the central bank's "dual mandate" of promoting full
employment as well as stable prices.
And in describing his approach, he sharply distanced it from those of
some central banks that focus almost exclusively on an inflation
target and not at all on promoting growth. "I don't agree with that,"
Mr. Bernanke declared flatly
When confronted with passages from a textbook he had written, in
which he asserted that budget deficits tend to push up interest rates
and "crowd out" private investments, he conceded that "it's possible"
that tax cuts could cause more problems than they solve.
Figure 15-1, p. 436. Federal Funds Rate: Actual and
Suggested
Taylor Rule, p. 435: Fed. Funds rate = π + 0.5(π - 2.0) + 0.5 (Y - Ybar)
Robert Lucas
Born 1937 in state of Washington
Parents were leftist, blue collar,
working class.
Undergraduate major in history at
U. of Chicago, where he has spent
most of his academic career.
Nobel Prize in 1995, primarily for
work in Rational Expectations.
Thomas Sargent
Born 1943 in Pasadena, California.
B.A. at UC-Berkeley, Ph.D. Harvard, 1968
Nobel Prize, 2011 for his work in Rational
Expectations (and related areas)
Taught at Penn, Minnesota, Stanford, and is now at NYU.
Describes himself as a Democrat, “a fiscally conservative, socially
liberal Democrat,” adding, “I think that budget constraints are really
central.”
It’s important to consider the “incentive effects” of government
policies, he continued. “There are trade-offs in efficiency and equality,
and they lead to choices that aren’t easy,” he said. [NY Times]
Robert Barro, 1944Undergrad at CalTech in physics, Ph.D. from
Harvard. Taught for several years at Chicago,
and now is at Harvard. Ex-columnist for Business
Week.
Known as proponent of “Ricardian Equivalence,”
positing that government deficit spending will
not increase aggregate demand, as people
will reduce current spending to save up for eventual repayment of the
government debt. (discussed in Chapter 19, pp. 554 ff). Not
surprisingly, he is harshly critical of Keynesian countercyclical policies.
Has recently switched to the study of the economics of religion and
culture on the macroeconomy.
Fig. 18-2, p. 535. Inflation and Central Bank
Independence
Table 14-1 p. 388
Table 14-2, p. 391