in this session we want to understand: arguments for and against discretionary fiscal and monetary...
TRANSCRIPT
In this session we want to understand:
• arguments for and against discretionary fiscal and monetary policies
• arguments for policy credibility
Perfect timing and information
Policy toolReal GDP
Expected
Contractionary policy
action
Actual
• Problems with discretionary policies:
• lags:– recognition lag
• Problems with discretionary policies:
• lags:– recognition lag– response lag
• decision making
• Problems with discretionary policies:
• lags:– recognition lag– response lag
• decision making
• implementation process
• Problems with discretionary policies:
• lags:– recognition lag– response lag
• decision making
• implementation process
– transmission lag
Discretionary policies are destabilizing
t1
Discretionary policies are destabilizing
t1
Policy tool
Path of the target variable
Discretionary policies are destabilizing. They increase their magnitude and longitude.
t1
t2
t1 is the expected inflationary surge
t3
Discretionary policies are destabilizing. They increase their magnitude and longitude.
t1
t2
t1 is the expected inflationary surge
t2 is when the policy is implemented
t3
Discretionary policies are destabilizing. They increase their magnitude and longitude.
t1
t2
t1 is the expected inflationary surge t2 is when the
policy is implemented
t3
t3 is when the policy becomes effective
t4
Discretionary policies are destabilizing. They increase their magnitude and longitude.
t1
t2
t1 is the expected inflationary surge t2 is when the
policy becomes implemented
t3
t3 is when the policy becomes effective
t4
The economy would have been out of its cyclical problem by t4
• Policymakers have more information that households and firms
• They act in the public interest rather for profit. This means they try to maximize the collective welfare.
• Time lags
• Policymakers act based on their own individual interest rather than public interest (Public Choice Theory)
• The economy is usually producing below its potential because of :– income tax which discourages labor to supply
less than they would otherwise do
• The economy is usually producing below its potential because of :– income tax which discourages labor to supply less than they would
otherwise do – government regulations discourage maximum
production
• The economy is usually producing below its potential because of :
– income tax which discourages labor to supply less than they would otherwise do
– government regulations discourage maximum production
• Policy makers must choose between ultimate goals of achieving capacity output and inflation (PC). Policymakers are apt to enact policies that are inflationary (Robert Barro and David Gordon).