Author Archives: Menzie Chinn

Five Reasons Why Fiscal Policy Might Be Completely Ineffective: A Textbook Exposition

It’s been frustrating to me that so much virtual ink has been spilled about why the fiscal package will or will not be effective, with so little clarity. Lots and lots of words are being thrown around, [1] [2] when a lot of the arguments can be summarized pretty easily in terms of four cases, and hence four graphs (I won’t deal with the fifth, in detail). There are numerous excellent critiques; here in the interest of specificity, the exposition will be fairly dense.

1. With prices predetermined, the interest sensitivity of money demand is zero, or the income sensitivity of money demand is infinite.

2. With prices predetermined, the interest sensitivity of investment or the sensitivity of net exports to interest rates are infinite.

3. With prices predetermined, the sensitivity of money demand to wealth is high.

4. Output is at full employment levels.

5. Neo-Ricardian equivalence, as put forward by Barro, holds.

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A Concise Summary of Macro Performance under the Presidents

From “Economic Setbacks That Define the Bush Years”:

“No matter who took office in 2001, they were destined to oversee dashed expectations regarding the economy, the markets and the geopolitical outlook,” said Robert Barbera, the chief economist of ITG. “It was all captured in the lunacy of the $5 trillion surplus on the horizon. That vision required no wars, no recessions and a nonstop spectacular bull market for equities.”

That said,” he added, “it certainly did not have to come to this.”

…

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Chinese Growth Plunges

From Bloomberg:

Jan. 22 — China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.

Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.

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A New Meme: Blame It on Beijing (and Seoul, and Riyadh…)

Perhaps I’m overstating it, but I think this is the abridged version of the Bush Administration’s perspective on how we got into the financial mess we find ourselves in. You might ask why I focus on the ideas of the outgoing government. Well, it’s because I’m confident that this will be a thesis pushed by some commentators eager to absolve previous policymakers of blame [1]. And indeed (as Mish points out), this view has apparently adherents in high places.

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I Hope They’re Right: The Forecast in the 2009 ERP

The Bush Administration’s last Economic Report of the President [large pdf] (Link updated 1/21/09 12:35pm Pacific) was released on Friday. From Chapter 1:

The Administration’s forecast calls for real GDP to continue to fall in the first half of 2009, with the major declines projected to be concentrated in the fourth quarter of 2008 and the first quarter of 2009. An active monetary policy and Treasury’s injection of assets into financial institutions are expected to ease financial stress and to lead to a rebound in the interest-sensitive sectors of the economy in the second half of 2009.

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One of My Favorite Papers on Multipliers

Germane to some of the ongoing debates over fiscal policy effectiveness [1] [2]:

Fiscal policy multipliers are central to Keynesian macroeconomics. In this paper I explore a
possible microeconomic foundation for one fundamental theory of income determination, the
‘Keynesian cross’. My model deviates from a Walrasian equilibrium model only by the assumption
of imperfect competition in the goods market. I show that textbook fiscal policy multipliers arise as a
limiting case.

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CEA Chair Lazear on the Economy

From Washington Post:

…

“It does look like a great eight years, aside from the last quarter, unfortunately,” Edward P. Lazear, chairman of Bush’s Council of Economic Advisers, said in a recent interview. “In the long term, things look good. The reason things look good is this economy will rebound, and it will rebound strongly. . . . We expect things to turn around, and I would say early in President Obama’s administration.”

…

International Imbalances: Measurement and Implications

Paul Kedrosky has observed that a statistical analysis (word cloud) of the American Economic Association session titles, or even of the papers, leads to the impression that the economics profession has been relatively uninterested in the ongoing financial and economic crisis. Unfortunately, this observation misses ignores the fact that session proposals are submitted a full eleven months ahead of the ASSA meetings. Think back to January 2008, and the terms ascribed to those who warned of a severe slowdown (“alarmist”, etc.), and the whole discussion is cast in a different light.

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