1
Intermediate
Macroeconomics
Lecture 11
2
The Macroeconomic Policy Debate
? William McChesney Martin
The fed.’s job is to take away the punch bowl
just as the party gets going
联储的工作是在宴会进行时拿走盛满酒的酒杯。
The economy is inherently unstable,
3
The Macroeconomic Policy Debate
? Milton Friedman
我们需要的不是把经济之车的方向盘一直调整到
不可预期的无规则之路上的高超货币司
机．．,
The economy is naturally stable…
4
The Macroeconomic Policy Debate
1,Active or passive?
2,Free to use discretion or fixed policy rule?
5
Should Policy Be Active or Passive?
? Active
In the absence of an active government role in
the economy,events like the Great
Depression could occur regularly,
? fight shocks by fiscal/monetary policy
6
Should Policy Be Active or Passive?
? Passive
① Lags in implementation & effects of policies
--- inside lag
--- outside lag
Automatic stabilizers
(income tax; unemployment insurance;
Martin Weitzman,profit sharing)
7
Should Policy Be Active or Passive?
? Passive
Economic forecasting is difficult,
--- index of leading indicators
--- economic models
8
Should Policy Be Active or Passive?
e.g,制造业工人平均生产周数
平均每周州失业保障首次申请
发放的新建筑许可证
敏感原料的价格变动
股票价格指数
根据通货膨胀调整的货币供给
消费者预期指数
9
Should Policy Be Active or Passive?
? Ignorance,expectations,& the,Lucas Critique”
Robert Lucas
Expectations play a crucial role in the economy
? Expectations depend on policies
? Estimating the effect of a policy change requires knowing
how people’s expectations will respond
? Traditional methods of policy evaluation do not
adequately take into account this impact of policy on
expectations
10
The Historical Record
? Still cannot settle the debate,because it is
not easy to identify the sources of economic
fluctuations,Multiple interpretations are
reasonable,
? We did better? Or the data did? Is the
stabilization of the economy a figment of the
data? (Christina Romer)
11
Should Policy be Conducted by Rule or
by Discretion?
The debate over rules v.s,discretion is distinct
from the debate over passive v.s,active
policy,
e.g,MS will grow steadily at 3% per year
MS will grow at 3%+(u-6%)
12
Should Policy be Conducted by Rule or
by Discretion?
1,Why not by discretion?
2,Possible policy rules
13
Why Not by Discretion?
1,Distrust of policy makers & the political process
① Incompetence
--- political process is erratic (reflects shifting
power of special interest groups)
--- economy is complicated while politicians often
do not have sufficient knowledge (charlatans
propose appealing but incorrect solutions)
14
Why Not by Discretion?
1,Distrust of policy makers & the political process
② Opportunism
Macroeconomic policy used as electoral ends
“political business cycle”
15
Why Not by Discretion?
Real GDP growth (Democratic)
Truman -0.8 8.9 7.6 3.7
Kennedy/Johnson 2.3 6.1 4.3 5.8
Johnson 6.4 6.5 2.5 4.7
Carter 4.7 5.4 2.8 -0.3
Clinton I 2.3 3.5 2.3 3.4
Clinton II 3.9 4.2 4.5 3.7
Average 3.1 5.8 4 3.5
16
Why Not by Discretion?
Eisenhower I 4.6 -0.7 7.1 2.0
Eisenhower II 1.9 -1.0 7.4 2.4
Nixon 3.0 0.1 3.3 5.5
Nixon/Ford 5.8 -0.6 -0.4 5.4
Reagan I 2.3 -2.1 4.0 7.0
Reagan II 3.6 3.1 2.9 3.8
G.H.W.Bush 3.4 1.2 -0.9 2.7
G.W.Bush 0.5 2.2 3.1 ---
Average 3.1 0.3 3.3 4.1
17
Why Not by Discretion?
2,Time inconsistency of discretionary policy
Policy makers tend to announce policy change
in advance to influence the expectations
? If private decision-makers really have acted
on the basis of their expectations,
policymakers has an incentive to renege
18
Rules for Monetary Policy
? Money supply grow at a steady rate
? Nominal GDP target
? Price level target
All 3 are nominal variables --- nobody knows
exactly what the real levels are
19
Rules for Fiscal Policy
? Balanced-budget rule
Budget deficit or surplus can
? help stabilize the economy
? be used to minimize the distortion of incentives
caused by the tax system
? be used to shift tax burdens between different
generations
20
Conclusions
? Lucas:,As an advice-giving profession we are in
way over our heads”
There is no simple and compelling case for any
particular view of macroeconomic policy
? Weigh the various arguments
? Cannot sit back and wait till knowledge has been
perfected
? Be cautious when making advice
Intermediate
Macroeconomics
Lecture 11
2
The Macroeconomic Policy Debate
? William McChesney Martin
The fed.’s job is to take away the punch bowl
just as the party gets going
联储的工作是在宴会进行时拿走盛满酒的酒杯。
The economy is inherently unstable,
3
The Macroeconomic Policy Debate
? Milton Friedman
我们需要的不是把经济之车的方向盘一直调整到
不可预期的无规则之路上的高超货币司
机．．,
The economy is naturally stable…
4
The Macroeconomic Policy Debate
1,Active or passive?
2,Free to use discretion or fixed policy rule?
5
Should Policy Be Active or Passive?
? Active
In the absence of an active government role in
the economy,events like the Great
Depression could occur regularly,
? fight shocks by fiscal/monetary policy
6
Should Policy Be Active or Passive?
? Passive
① Lags in implementation & effects of policies
--- inside lag
--- outside lag
Automatic stabilizers
(income tax; unemployment insurance;
Martin Weitzman,profit sharing)
7
Should Policy Be Active or Passive?
? Passive
Economic forecasting is difficult,
--- index of leading indicators
--- economic models
8
Should Policy Be Active or Passive?
e.g,制造业工人平均生产周数
平均每周州失业保障首次申请
发放的新建筑许可证
敏感原料的价格变动
股票价格指数
根据通货膨胀调整的货币供给
消费者预期指数
9
Should Policy Be Active or Passive?
? Ignorance,expectations,& the,Lucas Critique”
Robert Lucas
Expectations play a crucial role in the economy
? Expectations depend on policies
? Estimating the effect of a policy change requires knowing
how people’s expectations will respond
? Traditional methods of policy evaluation do not
adequately take into account this impact of policy on
expectations
10
The Historical Record
? Still cannot settle the debate,because it is
not easy to identify the sources of economic
fluctuations,Multiple interpretations are
reasonable,
? We did better? Or the data did? Is the
stabilization of the economy a figment of the
data? (Christina Romer)
11
Should Policy be Conducted by Rule or
by Discretion?
The debate over rules v.s,discretion is distinct
from the debate over passive v.s,active
policy,
e.g,MS will grow steadily at 3% per year
MS will grow at 3%+(u-6%)
12
Should Policy be Conducted by Rule or
by Discretion?
1,Why not by discretion?
2,Possible policy rules
13
Why Not by Discretion?
1,Distrust of policy makers & the political process
① Incompetence
--- political process is erratic (reflects shifting
power of special interest groups)
--- economy is complicated while politicians often
do not have sufficient knowledge (charlatans
propose appealing but incorrect solutions)
14
Why Not by Discretion?
1,Distrust of policy makers & the political process
② Opportunism
Macroeconomic policy used as electoral ends
“political business cycle”
15
Why Not by Discretion?
Real GDP growth (Democratic)
Truman -0.8 8.9 7.6 3.7
Kennedy/Johnson 2.3 6.1 4.3 5.8
Johnson 6.4 6.5 2.5 4.7
Carter 4.7 5.4 2.8 -0.3
Clinton I 2.3 3.5 2.3 3.4
Clinton II 3.9 4.2 4.5 3.7
Average 3.1 5.8 4 3.5
16
Why Not by Discretion?
Eisenhower I 4.6 -0.7 7.1 2.0
Eisenhower II 1.9 -1.0 7.4 2.4
Nixon 3.0 0.1 3.3 5.5
Nixon/Ford 5.8 -0.6 -0.4 5.4
Reagan I 2.3 -2.1 4.0 7.0
Reagan II 3.6 3.1 2.9 3.8
G.H.W.Bush 3.4 1.2 -0.9 2.7
G.W.Bush 0.5 2.2 3.1 ---
Average 3.1 0.3 3.3 4.1
17
Why Not by Discretion?
2,Time inconsistency of discretionary policy
Policy makers tend to announce policy change
in advance to influence the expectations
? If private decision-makers really have acted
on the basis of their expectations,
policymakers has an incentive to renege
18
Rules for Monetary Policy
? Money supply grow at a steady rate
? Nominal GDP target
? Price level target
All 3 are nominal variables --- nobody knows
exactly what the real levels are
19
Rules for Fiscal Policy
? Balanced-budget rule
Budget deficit or surplus can
? help stabilize the economy
? be used to minimize the distortion of incentives
caused by the tax system
? be used to shift tax burdens between different
generations
20
Conclusions
? Lucas:,As an advice-giving profession we are in
way over our heads”
There is no simple and compelling case for any
particular view of macroeconomic policy
? Weigh the various arguments
? Cannot sit back and wait till knowledge has been
perfected
? Be cautious when making advice
