Here are the directions to post your talking points to my blog. First clink on the comments link. Next highlight and copy your talking points. Now come back to the comments page and paste them into the “Leave your comment” window. Just below the “Leave your comment” window choose your identity as “Other” and type your first and last name in the appropriate box (this is how you will get credit for your talking points – note: after the final exam I will delete all comments). If you wish to preview how your talking points will look in the comment section click on the “Preview” button. Use the back button if you wish to further edit your talking points. Once you are happy with the way your talking points will look click the “Publish” button and you are done!
There is currently no way to edit published comments so if you wish to change your talking points you will have to delete your comment and re-post an improved set (only you and I can do this). To delete your comment click on comments, then scroll to the end of your comment and click on the trashcan below and to the left of your comment. Next check the box for "Remove forever?" then click on "Delete Comment." At this point follow the directions in the first paragraph to re-post your talking points as a comment.
I hope this was useful. If you encounter problems posting to the blog please email me (do not be worried if your talking points do not seem to be published immediately as there may be a delay until I manually "re-publish" the entire blog).
1. A potential drawback of discretionary policy is that the public may disbelieve policy if there is a history of time inconsistency. 2. The economy may experience a change in consumption after a debt-financed tax cut, depending on whether or not consumers make rational decisions, specifically in regards to borrowing. 3. Speed limit policies can only be effective if expectations are important determinants of inflation. 4. Transparent policy could be argued to make actual inflation more variable. 5. Automatic fiscal stabilizers have greater stabilization effects than discretionary fiscal policy because they do not experience as large of a lag.
1) Actions of the Central Bank should be transparent to reduce the negative effects of individuals that would otherwise not expect the changes in monetary policy, effectively mitigating any potential time inconsistency. 2) Fiscal policy may help stabilize an economy through tax cuts and other increases in consumption, though it is still debated whether it has a positive ability to combat recessions through extended discretionary spending because of time lag. 3) While keeping the economy at a set level of growth or as close to potential as possible, benefits, such as stability, will still be dependant on individuals expectations. 4) Discretion, though highly debated has proved to be an invaluable tool to the Fed in the past, and could prove to be again in the future. 5) Economics is neither an art nor a science; complex variables including human nature make accurate predictions exceptionally difficult. It is the job of the Fed to do the best job possible.
1. The fed need to be very transparent when making policy changes by making sure that the public has the same information as the fed.
2. The Ricardian view places some restrictions of the role of fiscal policy because it limits the ability in which fiscal policies can affect the economy; this happens because a Ricardian is forward-looking, which means their spending is based on both current and future incomes.
3. One must understand that there is a monetary transition period that takes approximately 9 to 18 months to have any real effect on the economy.
4. The fed needs to analyze the output gap very carefully when trying to put the economy back into potential, which becomes difficult because it is very hard to determine the economy’s output potential.
5. There is no simple way in determining macroeconomic policy it falls into the hands of the policy makers to weight the cost of each argument and then decide what actions need to be taken.
1. Treating monetary policy more like a science seems nonsensical because it is absolutely essential that an individual’s judgment, such as Chairman Greenspan’s, is taken into consideration when making policy decisions.
2. The interaction between monetary and fiscal policy is an important policy tool for stabilization because it can bring forth result in a more timely fashion than fiscal and monetary policies alone.
3.Transparency in monetary policy is useful as long as the public is provided the same information as is provided to the Fed.
4.People’s expectations of what will happen in the future economy is something policy has a hard time correcting for; however, speed limit policies prove to be an effective way to alleviate the problem of expected future inflation.
5.A lack of active government intervention and policy making would increase the likelihood of disastrous economic events such as the Great Depression.
1. Monetary Policy is an art, so it must be left open for discretion. 2. Speed limit policies stabilize inflation and the output gap better than do policies that focus directly on the level of output gap. 3. Policy conducted by rule removes the political business cycle. 4. The Fed must act before inflation increases or the economy goes into recession. 5. Inflation targeting has the political advantage that it is easy to explain to the public.
1. One reason that stabilization policies such as monetary and fiscal policies are not the easy things to use precisely is due to the delayed time of their influence know as lags.
2. Expectations are often left out in the process of policy evaluation, which is not the best idea because expectations can have a big influence on future behavior of the economy. (Lucas critique)
3.When exploring whether stabilization policy should play an active or passive role in the economy, we must give some weight to the historical record of the economy.
4.Economist tend to generally agree that it is important to have the primary goal of monetary policy to maintain a low steady rate of inflation.
5.One problem with focusing on the output gap is that it is hard to know what the actual gap is.
1) Monetary policy should be backed by accurate information and should have the sole ambition of keeping output as close as possible to the full-employment output.
2) The central bank’s policy should be to keep the interest rate at its target level through an interest rate in conformity to the Taylor principle, but also taking into consideration the trade-off between inflation and employment.
3) The central bank should strive to better predict and counter economic fluctuation, thus making a firm statement that would influence expectations and policy tradeoffs.
4) Transparency is necessary to guarantee more accountability of the central bank, thus improving performance and reducing the risks of over-expansionary policy.
5) The central bank’s performance could be improved through the implementation of more precise economic models, more accurate economic data, and greater involvement of the public through a transparent setting.
1) Fiscal policy changes can end up being contradictory because if there is an increase in government spending, taxes will eventually rise which will slow down the economy’s expansion.
2) Both monetary and fiscal policies involve lags which make future predictions difficult when changing economic expansion.
3) Fiscal policy can stabilze the economy without making any changes because when the economy is in recession, tax and spending changes automatically.
4) Using both monetary and fiscal policies together can cut down on some of the lags and being back the economy in a quicker fashion.
5) It is important to monitor the output gap when making policy changes but it is difficult to know exactly what the output gap is at.
1. According to Carl Walsh’s article there are three basic principles that economists use together to create the foundation of creating monetary policy: focus on the output gap, follow the Taylor Principle and be forward-looking. . 2. There is an ongoing theme regarding monetary policy no matter who/what you are consulting for a solution to its’ problems: providing the public with all of the information available almost always leads to the most beneficial outcome (or the one that the Fed is aiming for) mainly because people are rational thinkers, however, they cannot think rationally when only some information is available to them (this idea is referred to as transparency in monetary policy). 3. Regarding the government debt, there are two popular views as to how consumers react to a increase/decrease in taxes: the traditional view which says that consumption always increases when there is an increase in taxes in the future (and vice versa) because they believe it would be cheaper to buy things now than later and the opposing view called the Ricardian view states that consumers are forward-looking and they would not react in this fashion because that has negative repercussions for future generations (whom they care about) and their future income. 4. Speed limit policies give economists a different outlook on the usual monetary policy issues (which improve the tradeoff between output and inflation), although there are a few problems with it’s measurement and it is uncertain whether the Fed actually follows the “speed limit” at all times. 5. Monetary policy is far from an exact science and in the past there have been many mistakes and other slip ups that have resulted in major problems for our economy.
1. If the Fed engages only in expansionary policies to keep output above potential, higher inflation will result which leads to the Fed to make sure it focuses on keeping a realistic output objective and stabilizes the output gap. 2. Monetary policy must always remain forward-looking and focus on the policy effects on future expectations. Monetary policy cannot be strictly a reaction to short term fluctuations. 3. Effective Fed policy relies on good data, good economic models, and good judgment. Monetary policy relies heavily on good forecasters. 4. The current output gap between potential and actual GDP is very hard to measure. Thus, the Fed’s analysis and policy in reaction to their predictions of the output gap are integral in controlling the expected rates of inflation for the public. 5. Transparency in monetary policy is integral in establishing trust between the public and policy makers, which leads to well guided expectations for the future of the economy. This is key in establishing successful monetary policy.
1) Economists differ greatly on policy initiatives. While some view active policy as necessary to curb the frequent shocks of the economy, other economists advocate passive policy. These economists state that the knowledge of the economy is too primitive, and attempting to stabilize the economy may actually cause further disruption.
2) Policy initiatives have time lags which create inconsistency in attempting to stabilize the economy. These time lags make it harder for economists to forecast if the target rates they had previously set created a change in the economy, or if these changes were induced by other foreign factors.
3) Fiscal expansions may be contractionary because they can change future expectations about the government policy. For example, an increase in government spending creating a further deficit may cause consumers to realize higher interest rates in the future, which reduces investment and offsets the fiscal expansion.
4) Fiscal policy depends upon consumer expectations. The Ricardian View and the traditional view pose differences of opinion. The Ricardian View states that consumers are rational and will not increase consumption because in the long run there will be higher taxes. The traditional view states that increased income leads to increased expenditure.
5) Further debate continues over the role of transparency within the FED. Some economists argue that transparency by the FED enables the public to make more accurate forecasts about future FED policy. Other economists cite that transparency can cause inflation expectations to become more variable, which causes actual inflation to become more variable.
1. The persistence in policy implementation introduced by the speed limit policy lowers the tradeoff between inflation and unemployment by favorably altering the public’s expected inflation rates.
2. For short-run fluctuations in the economy, monetary policy and automatic fiscal stabilizers should be implemented in place of fiscal policy because it has more of an immediate effect on the real economy.
3. Conveying policy objectives more clearly to the public will eliminate price surprises in the economy because people can anticipate actions by the Fed, and subsequently, monetary policy will have less of an effect on output.
4. In regards to the Ricardian Equivalence, fiscal policies will be self deadening because the public will react to the expectation of future fiscal action needed to offset the change in the budget deficit.
5. Monetary policy faces a lag time of 12-18 months before its effects are felt in the real economy, which forces the Fed to be ‘forward looking’ in regards to policy implementation.
1. By altering future expectations, policy decision’s effects extend beyond their immediate impact.
2. Policy decisions are seldom clear-cut, rather they generally mediate the tradeoffs between varying degrees of good or bad.
3. Discretionary fiscal policy’s effect on the economy is debatable due to the time lag in its implementation and its possible effect on expectations.
4. Since fiscal policy is often muddled with opportunistic politics and ulterior motives policy interaction between the Fed and the Government might result in an amalgam that only exacerbates conditions.
5. Monetary policy is the product of theoretical guidance provided by economic models (science) and good judgment from the FOMC (art).
1. Lag time makes it difficult to stabilize the economy.
2. Republicans tend to dislike inflations so they are willing to put the economy into a recession while Democrats tend to dislike unemployment and are willing to endure higher inflation.
3. It is better for central banks to be more independent because studies show that these banks are associated with lower and more stable inflation.
4. The Fed should not target real variables such as unemployment and real GDP; instead, they should target nominal variables such as inflation and nominal GDP.
5. If consumers are forward thinking, a debt-financed tax cut leaves consumption unaffected (Ricardian Equivalence).
1. Economic forecasters try and stay ahead of the economy using leading indicators, which are different data series’ that fluctuates in advance of the economy. [These include: Average production of workers per week, orders for consumer good and materials, vendor performance, new building permits, and there are others.] 2. Monetary policy and automatic fiscal stabilizers remain the first line of defense for ensuring short-run economic stability. 3. Despite advances when it comes to enacting policy, conducting the appropriate policy is still far from routine procedure. The precise level of guidance that is required to know which “scientific” model to use is still missing from econometrics. The art of conducting policy lies in the ability to translate the general principles into actual policy decisions. 4. Expectations play a large role in the economy because they influence economic behavior. Time inconsistency changes expectations, and creates a void between the Fed’s policy and the economy’s reaction, making policy implementation increasingly difficult. 5. It usually takes about six to eight months of lag for monetary policy to take effect, therefore, policymakers must remain ahead of the economy by about this much in order to be useful.
1. The decisions people make today in regards to prices and wages are influenced by their expectations of the actions of the central bank as people will ultimately base their spending on their current income as well as their expected future income. 2. Although a transparent policy is created to allow the public to accurately gauge the central bank’s intentions in order to make more informed decisions regarding future policy actions, transparency comes at a cost of assuming the public is able to understand the economic model used by the central bank and that any known changes in the bank’s objectives will lead to a fluctuation of the public’s expectations, inevitably changing the actual inflation rate as well. 3. While inflation targeting may prove to be a transparent way of implementing monetary policy, the opportunity for sudden occurrences and fluctuations is unavoidable, making the aimed transparent policy in actuality one of uncertainty and opaqueness. 4. Despite the dilemma as to whether policy making should be passive due the lack of success with stabilization policies and variable lag periods, or active in helping to prevent shocks to the economy by utilizing fiscal or monetary tools, both approaches acknowledge the necessity of policymakers in being cautious to account for the lag time between shocks to the economy and the actions of the correction policy. 5. While difficulties and errors arise in accurately predicting movements of the economy due to long lags and in measuring the current level of trend output, inevitably both fiscal and monetary policies continue to remain the first tools utilized in attempts to ensure short run economic stability.
1. Fiscal policy suffers from a long inside lag because of politics and monetary policy suffers a long outside lag because firms make investment plans far in advance. 2. The best economic forecasts are made based on leading indicators, but even then forecasts are unreliable and have a large margin of error. 3. Central banks should be as independent as possible because there is a strong correlation between independence and low inflation, with no negative effects on real economic activity. 4. A speed limit policy is a good solution to the time inconsistency problem because it focuses on the changes in the output gap. 5. While automatic stabilizers clearly moderate economic fluctuations, the benefits of discretionary fiscal policy is questionable because of time lags and changes in expectations.
1. Although discretionary policies provide policymakers with the ability to use their wisdom to foresee unexpected future economic conditions, macroeconomists must be cautious since politicians can make mistakes and use policies for their own political benefit.
2. The Federal Reserve must strive for consistency and transparency with their macroeconomic objectives so that the public can trust, understand and can predict their motives.
3. Macroeconomists must be active policymakers in order to compensate for the unexpected adverse or favorable shocks that lead to economic instability during the monetary policy’s outside lag time.
4. Although it is not a complete guideline, policymakers should adhere to the Taylor Principle, which states that an increase in the inflation rate yields a policy that raises the real rate of interest one for one. This can help ensure appropriate reactions to changing economic conditions.
5. The art of transforming economic analysis into actual policy decisions is important because there is insufficient economic data to provide policymakers with sufficient quantifiable direction; such as the current output gap, the extent to which the federal funds rate should be increased and how much inflation will rise or fall in the next six months.
1. Under the Ricardian view of effects of economic policy changes people are rational about how they spend their money and make consumption decisions based on their life time income, and not short term increases or deceases in their income.
2. While people are rational beings who are capable of understanding the effects of their consumption on their future income and wealth, they can be shortsighted and see a short term increase in income as the ability to consume more, without thought to future effects that would decrease their income.
3. Transparency of monetary policy is a double edged sword; the public can quickly catch on to new policies and prevents the central bank from implementing overly ambitious policies while it also can hurt if the public does not understand the actions being taken.
4. Speed limit policies, by following the rate of growth of output instead of the gap between potential and actual output, allow for more controlled policy outcomes because potential output cannot be calculated directly.
5. Expectations of future actions by the fed can affect the economy just as much as the actions themselves because what people think effects how much they consume.
1. Policy makers need to focus on public expectations of what the central bank is going to do. The actions of the central bank will influence the actions of the public. Monetary policy doesn't happen in a vacuum. 2. Policy makers should keep the example of Japan in mind. The so-called liquidity trap can become a huge problem if the interest rates fall to zero. If this happens, it may be beyond the capabilities of monetary policy to rectify the problem. 3. Passive fiscal policy stabilizers act automatically and are a good way for the economy to adjust, an example of these would be increased government spending on unemployment if the economy goes into recession. 4. Policy makers should be mindful of lags, the effects of monetary policy might not be fully felt or fully effective until 18 months after the fact. 5. Monetary policy is an art as well as a science. The effectiveness of experience and leadership cannot be underestimated, the public looks to the fed chair for leadership, and they will base their actions, in part, on the actions of the central bank.
1. Although more independent banks are associated with lower and more stable π, there is no relationship b/w central bank independence and real economic activity. < Central bank independence= benefit of lower π w/o any apparent cost> 2. Inflation forecast targeting satisfies all 3 principles of monetary policy (output gap, Taylor Principle, Be forward looking) while making monetary policy more transparent for the public, which allows them to forecast more accurately and confidently. 3. There is no simple or compelling case for any macroeconomic policy observation. Each of the 7 readings proposed different arguments and/or problems that arise with certain stabilization policies arousing much debate between economists. 4. Even though economists are trying to design monetary policy to be more scientific, the making of a policy is not a science, it is a combintion of both science and art. Policy making will always need science as well as an artful 'touch' from an educated policy maker. 5. Instead of ignoring the output gap altogether, policymakers may want to focus on the gap in b/w the growth rate of output and the growth rate of trend output (the change in the output gap). This means that AD grows roughly at the expected rate of increase in AS.
- excessive inflation can result from ambitious output objects put forth by the Fed - the Taylor Principal, which calls for a one-to-one increase of the real interest rate in response to inflation, causes an economic slowdown and brings the Fed bank back to its target interest rate - inflation forecast targeting shrinks the duration of lags in policy implementation, allowing for low levels of inflation and stable output gaps - transparency within the FOMC, through public press releases and the sharing of economic forecasts, lowers expected inflation causing a lower actual inflation rate - the influence of government debt on the economy depends on the public's awareness of its affects in the future and the cost of incorporating those perceived affects into consumption habits
1. Inflation forecast targeting is a necessary policy framework tool for stabilizing inflation at low levels and stabilization of the output gap.
2. The level of the output gap should not be measured; policy makers would be better off focusing on the gap between the growth rate of output and the growth rate of trend output (change in the output gap).
3. Changes in Discretionary fiscal policies tend to be ineffective and influenced by lagging; discretionary fiscal policy should not be used as a stabilization process unless under emergencies (ex: interest rates fall below zero).
4. Commitment to a fixed policy rule will alleviate the problems of time inconsistency, provide credibility for the Fed, and result in favorable tradeoffs between inflation and unemployment.
5. Traditional and Ricardian views of government debt along with rational and adaptive models of consumer expectations should always be included to view the consumption effects of expansionary or contractionary fiscal policy
Data can be interpreted in different ways; the past does not provide definitive answers on how to solve present macroeconomic problems.
The lags in policymakers’ knowledge about the economy and in the consequences of policy changes significantly complicate Fiscal and Monetary policy decisions.
Policymakers need to decide if their main objective is to keep a low and steady inflation rate or is to maintain a given unemployment rate.
Some economists believe that when there is a decrease in taxes, even though government spending stays constant, GDP will largely be unaffected.
Recent fluctuations in the economy look much smaller than those in the past; this may be because of improvements in data collection or it may be a result of superior use of monetary policy.
1) The central bank should strive to stabilize output around potential this will decrease major shocks to the econonmy.
2) The main reason why fiscal policy incurs problems is becasue there is such a time lag for the reaction of the economy to the policy change.
2. Ricardian views causes a lot of confusion in the econonmy because it conflicts with the regular economist views.
3. Speed limit policies produce good outputs when the public expectation of inflation and output determines consumtion or investment. 4. An ideal solution would be to have a automatic stabilizer that mediates economic fluctuation through expectations.
5. The Fed must strive for consistency so that they can acquire the publics trust and the public can hold the Fed accountable for their actions.
27 comments:
Here are the directions to post your talking points to my blog. First clink on the comments link. Next highlight and copy your talking points. Now come back to the comments page and paste them into the “Leave your comment” window. Just below the “Leave your comment” window choose your identity as “Other” and type your first and last name in the appropriate box (this is how you will get credit for your talking points – note: after the final exam I will delete all comments). If you wish to preview how your talking points will look in the comment section click on the “Preview” button. Use the back button if you wish to further edit your talking points. Once you are happy with the way your talking points will look click the “Publish” button and you are done!
There is currently no way to edit published comments so if you wish to change your talking points you will have to delete your comment and re-post an improved set (only you and I can do this). To delete your comment click on comments, then scroll to the end of your comment and click on the trashcan below and to the left of your comment. Next check the box for "Remove forever?" then click on "Delete Comment." At this point follow the directions in the first paragraph to re-post your talking points as a comment.
I hope this was useful. If you encounter problems posting to the blog please email me (do not be worried if your talking points do not seem to be published immediately as there may be a delay until I manually "re-publish" the entire blog).
1. A potential drawback of discretionary policy is that the public may disbelieve policy if there is a history of time inconsistency.
2. The economy may experience a change in consumption after a debt-financed tax cut, depending on whether or not consumers make rational decisions, specifically in regards to borrowing.
3. Speed limit policies can only be effective if expectations are important determinants of inflation.
4. Transparent policy could be argued to make actual inflation more variable.
5. Automatic fiscal stabilizers have greater stabilization effects than discretionary fiscal policy because they do not experience as large of a lag.
1) Actions of the Central Bank should be transparent to reduce the negative effects of individuals that would otherwise not expect the changes in monetary policy, effectively mitigating any potential time inconsistency.
2) Fiscal policy may help stabilize an economy through tax cuts and other increases in consumption, though it is still debated whether it has a positive ability to combat recessions through extended discretionary spending because of time lag.
3) While keeping the economy at a set level of growth or as close to potential as possible, benefits, such as stability, will still be dependant on individuals expectations.
4) Discretion, though highly debated has proved to be an invaluable tool to the Fed in the past, and could prove to be again in the future.
5) Economics is neither an art nor a science; complex variables including human nature make accurate predictions exceptionally difficult. It is the job of the Fed to do the best job possible.
1. The fed need to be very transparent when making policy changes by making sure that the public has the same information as the fed.
2. The Ricardian view places some restrictions of the role of fiscal policy because it limits the ability in which fiscal policies can affect the economy; this happens because a Ricardian is forward-looking, which means their spending is based on both current and future incomes.
3. One must understand that there is a monetary transition period that takes approximately 9 to 18 months to have any real effect on the economy.
4. The fed needs to analyze the output gap very carefully when trying to put the economy back into potential, which becomes difficult because it is very hard to determine the economy’s output potential.
5. There is no simple way in determining macroeconomic policy it falls into the hands of the policy makers to weight the cost of each argument and then decide what actions need to be taken.
1. Treating monetary policy more like a science seems nonsensical because it is absolutely essential that an individual’s judgment, such as Chairman Greenspan’s, is taken into consideration when making policy decisions.
2. The interaction between monetary and fiscal policy is an important policy tool for stabilization because it can bring forth result in a more timely fashion than fiscal and monetary policies alone.
3.Transparency in monetary policy is useful as long as the public is provided the same information as is provided to the Fed.
4.People’s expectations of what will happen in the future economy is something policy has a hard time correcting for; however, speed limit policies prove to be an effective way to alleviate the problem of expected future inflation.
5.A lack of active government intervention and policy making would increase the likelihood of disastrous economic events such as the Great Depression.
1. Monetary Policy is an art, so it must be left open for discretion.
2. Speed limit policies stabilize inflation and the output gap better than do policies that focus directly on the level of output gap.
3. Policy conducted by rule removes the political business cycle.
4. The Fed must act before inflation increases or the economy goes into recession.
5. Inflation targeting has the political advantage that it is easy to explain to the public.
1. One reason that stabilization policies such as monetary and fiscal policies are not the easy things to use precisely is due to the delayed time of their influence know as lags.
2. Expectations are often left out in the process of policy evaluation, which is not the best idea because expectations can have a big influence on future behavior of the economy. (Lucas critique)
3.When exploring whether stabilization policy should play an active or passive role in the economy, we must give some weight to the historical record of the economy.
4.Economist tend to generally agree that it is important to have the primary goal of monetary policy to maintain a low steady rate of inflation.
5.One problem with focusing on the output gap is that it is hard to know what the actual gap is.
1) Monetary policy should be backed by accurate information and should have the sole ambition of keeping output as close as possible to the full-employment output.
2) The central bank’s policy should be to keep the interest rate at its target level through an interest rate in conformity to the Taylor principle, but also taking into consideration the trade-off between inflation and employment.
3) The central bank should strive to better predict and counter economic fluctuation, thus making a firm statement that would influence expectations and policy tradeoffs.
4) Transparency is necessary to guarantee more accountability of the central bank, thus improving performance and reducing the risks of over-expansionary policy.
5) The central bank’s performance could be improved through the implementation of more precise economic models, more accurate economic data, and greater involvement of the public through a transparent setting.
1) Fiscal policy changes can end up being contradictory because if there is an increase in government spending, taxes will eventually rise which will slow down the economy’s expansion.
2) Both monetary and fiscal policies involve lags which make future predictions difficult when changing economic expansion.
3) Fiscal policy can stabilze the economy without making any changes because when the economy is in recession, tax and spending changes automatically.
4) Using both monetary and fiscal policies together can cut down on some of the lags and being back the economy in a quicker fashion.
5) It is important to monitor the output gap when making policy changes but it is difficult to know exactly what the output gap is at.
1. According to Carl Walsh’s article there are three basic principles that economists use together to create the foundation of creating monetary policy: focus on the output gap, follow the Taylor Principle and be forward-looking. .
2. There is an ongoing theme regarding monetary policy no matter who/what you are consulting for a solution to its’ problems: providing the public with all of the information available almost always leads to the most beneficial outcome (or the one that the Fed is aiming for) mainly because people are rational thinkers, however, they cannot think rationally when only some information is available to them (this idea is referred to as transparency in monetary policy).
3. Regarding the government debt, there are two popular views as to how consumers react to a increase/decrease in taxes: the traditional view which says that consumption always increases when there is an increase in taxes in the future (and vice versa) because they believe it would be cheaper to buy things now than later and the opposing view called the Ricardian view states that consumers are forward-looking and they would not react in this fashion because that has negative repercussions for future generations (whom they care about) and their future income.
4. Speed limit policies give economists a different outlook on the usual monetary policy issues (which improve the tradeoff between output and inflation), although there are a few problems with it’s measurement and it is uncertain whether the Fed actually follows the “speed limit” at all times.
5. Monetary policy is far from an exact science and in the past there have been many mistakes and other slip ups that have resulted in major problems for our economy.
1. If the Fed engages only in expansionary policies to keep output above potential, higher inflation will result which leads to the Fed to make sure it focuses on keeping a realistic output objective and stabilizes the output gap.
2. Monetary policy must always remain forward-looking and focus on the policy effects on future expectations. Monetary policy cannot be strictly a reaction to short term fluctuations.
3. Effective Fed policy relies on good data, good economic models, and good judgment. Monetary policy relies heavily on good forecasters.
4. The current output gap between potential and actual GDP is very hard to measure. Thus, the Fed’s analysis and policy in reaction to their predictions of the output gap are integral in controlling the expected rates of inflation for the public.
5. Transparency in monetary policy is integral in establishing trust between the public and policy makers, which leads to well guided expectations for the future of the economy. This is key in establishing successful monetary policy.
1) Economists differ greatly on policy initiatives. While some view active policy as necessary to curb the frequent shocks of the economy, other economists advocate passive policy. These economists state that the knowledge of the economy is too primitive, and attempting to stabilize the economy may actually cause further disruption.
2) Policy initiatives have time lags which create inconsistency in attempting to stabilize the economy. These time lags make it harder for economists to forecast if the target rates they had previously set created a change in the economy, or if these changes were induced by other foreign factors.
3) Fiscal expansions may be contractionary because they can change future expectations about the government policy. For example, an increase in government spending creating a further deficit may cause consumers to realize higher interest rates in the future, which reduces investment and offsets the fiscal expansion.
4) Fiscal policy depends upon consumer expectations. The Ricardian View and the traditional view pose differences of opinion. The Ricardian View states that consumers are rational and will not increase consumption because in the long run there will be higher taxes. The traditional view states that increased income leads to increased expenditure.
5) Further debate continues over the role of transparency within the FED. Some economists argue that transparency by the FED enables the public to make more accurate forecasts about future FED policy. Other economists cite that transparency can cause inflation expectations to become more variable, which causes actual inflation to become more variable.
1. The persistence in policy implementation introduced by the speed limit policy lowers the tradeoff between inflation and unemployment by favorably altering the public’s expected inflation rates.
2. For short-run fluctuations in the economy, monetary policy and automatic fiscal stabilizers should be implemented in place of fiscal policy because it has more of an immediate effect on the real economy.
3. Conveying policy objectives more clearly to the public will eliminate price surprises in the economy because people can anticipate actions by the Fed, and subsequently, monetary policy will have less of an effect on output.
4. In regards to the Ricardian Equivalence, fiscal policies will be self deadening because the public will react to the expectation of future fiscal action needed to offset the change in the budget deficit.
5. Monetary policy faces a lag time of 12-18 months before its effects are felt in the real economy, which forces the Fed to be ‘forward looking’ in regards to policy implementation.
1. By altering future expectations, policy decision’s effects extend beyond their immediate impact.
2. Policy decisions are seldom clear-cut, rather they generally mediate the tradeoffs between varying degrees of good or bad.
3. Discretionary fiscal policy’s effect on the economy is debatable due to the time lag in its implementation and its possible effect on expectations.
4. Since fiscal policy is often muddled with opportunistic politics and ulterior motives policy interaction between the Fed and the Government might result in an amalgam that only exacerbates conditions.
5. Monetary policy is the product of theoretical guidance provided by economic models (science) and good judgment from the FOMC (art).
1. Lag time makes it difficult to stabilize the economy.
2. Republicans tend to dislike inflations so they are willing to put the economy into a recession while Democrats tend to dislike unemployment and are willing to endure higher inflation.
3. It is better for central banks to be more independent because studies show that these banks are associated with lower and more stable inflation.
4. The Fed should not target real variables such as unemployment and real GDP; instead, they should target nominal variables such as inflation and nominal GDP.
5. If consumers are forward thinking, a debt-financed tax cut leaves consumption unaffected (Ricardian Equivalence).
1. Economic forecasters try and stay ahead of the economy using leading indicators, which are different data series’ that fluctuates in advance of the economy. [These include: Average production of workers per week, orders for consumer good and materials, vendor performance, new building permits, and there are others.]
2. Monetary policy and automatic fiscal stabilizers remain the first line of defense for ensuring short-run economic stability.
3. Despite advances when it comes to enacting policy, conducting the appropriate policy is still far from routine procedure. The precise level of guidance that is required to know which “scientific” model to use is still missing from econometrics. The art of conducting policy lies in the ability to translate the general principles into actual policy decisions.
4. Expectations play a large role in the economy because they influence economic behavior. Time inconsistency changes expectations, and creates a void between the Fed’s policy and the economy’s reaction, making policy implementation increasingly difficult.
5. It usually takes about six to eight months of lag for monetary policy to take effect, therefore, policymakers must remain ahead of the economy by about this much in order to be useful.
1. The decisions people make today in regards to prices and wages are influenced by their expectations of the actions of the central bank as people will ultimately base their spending on their current income as well as their expected future income.
2. Although a transparent policy is created to allow the public to accurately gauge the central bank’s intentions in order to make more informed decisions regarding future policy actions, transparency comes at a cost of assuming the public is able to understand the economic model used by the central bank and that any known changes in the bank’s objectives will lead to a fluctuation of the public’s expectations, inevitably changing the actual inflation rate as well.
3. While inflation targeting may prove to be a transparent way of implementing monetary policy, the opportunity for sudden occurrences and fluctuations is unavoidable, making the aimed transparent policy in actuality one of uncertainty and opaqueness.
4. Despite the dilemma as to whether policy making should be passive due the lack of success with stabilization policies and variable lag periods, or active in helping to prevent shocks to the economy by utilizing fiscal or monetary tools, both approaches acknowledge the necessity of policymakers in being cautious to account for the lag time between shocks to the economy and the actions of the correction policy.
5. While difficulties and errors arise in accurately predicting movements of the economy due to long lags and in measuring the current level of trend output, inevitably both fiscal and monetary policies continue to remain the first tools utilized in attempts to ensure short run economic stability.
1. Active fiscal policy incurs economic problems due to overcompensation and time lags.
2. Uncertainty about policy effectiveness based on Traditional vs. Ricardian views should deter some policymakers.
3. While policy should be geared towards fixing changes in the output gap, these trends are somewhat difficult to measure for the present.
4. Monetarist policy is not very effective for harnessing economic shocks.
5. There is no exact value of proportionality in the Taylor principle.
1. Fiscal policy suffers from a long inside lag because of politics and monetary policy suffers a long outside lag because firms make investment plans far in advance.
2. The best economic forecasts are made based on leading indicators, but even then forecasts are unreliable and have a large margin of error.
3. Central banks should be as independent as possible because there is a strong correlation between independence and low inflation, with no negative effects on real economic activity.
4. A speed limit policy is a good solution to the time inconsistency problem because it focuses on the changes in the output gap.
5. While automatic stabilizers clearly moderate economic fluctuations, the benefits of discretionary fiscal policy is questionable because of time lags and changes in expectations.
1. Although discretionary policies provide policymakers with the ability to use their wisdom to foresee unexpected future economic conditions, macroeconomists must be cautious since politicians can make mistakes and use policies for their own political benefit.
2. The Federal Reserve must strive for consistency and transparency with their macroeconomic objectives so that the public can trust, understand and can predict their motives.
3. Macroeconomists must be active policymakers in order to compensate for the unexpected adverse or favorable shocks that lead to economic instability during the monetary policy’s outside lag time.
4. Although it is not a complete guideline, policymakers should adhere to the Taylor Principle, which states that an increase in the inflation rate yields a policy that raises the real rate of interest one for one. This can help ensure appropriate reactions to changing economic conditions.
5. The art of transforming economic analysis into actual policy decisions is important because there is insufficient economic data to provide policymakers with sufficient quantifiable direction; such as the current output gap, the extent to which the federal funds rate should be increased and how much inflation will rise or fall in the next six months.
1. Under the Ricardian view of effects of economic policy changes people are rational about how they spend their money and make consumption decisions based on their life time income, and not short term increases or deceases in their income.
2. While people are rational beings who are capable of understanding the effects of their consumption on their future income and wealth, they can be shortsighted and see a short term increase in income as the ability to consume more, without thought to future effects that would decrease their income.
3. Transparency of monetary policy is a double edged sword; the public can quickly catch on to new policies and prevents the central bank from implementing overly ambitious policies while it also can hurt if the public does not understand the actions being taken.
4. Speed limit policies, by following the rate of growth of output instead of the gap between potential and actual output, allow for more controlled policy outcomes because potential output cannot be calculated directly.
5. Expectations of future actions by the fed can affect the economy just as much as the actions themselves because what people think effects how much they consume.
1. Policy makers need to focus on public expectations of what the central bank is going to do. The actions of the central bank will influence the actions of the public. Monetary policy doesn't happen in a vacuum.
2. Policy makers should keep the example of Japan in mind. The so-called liquidity trap can become a huge problem if the interest rates fall to zero. If this happens, it may be beyond the capabilities of monetary policy to rectify the problem.
3. Passive fiscal policy stabilizers act automatically and are a good way for the economy to adjust, an example of these would be increased government spending on unemployment if the economy goes into recession.
4. Policy makers should be mindful of lags, the effects of monetary policy might not be fully felt or fully effective until 18 months after the fact.
5. Monetary policy is an art as well as a science. The effectiveness of experience and leadership cannot be underestimated, the public looks to the fed chair for leadership, and they will base their actions, in part, on the actions of the central bank.
1. Although more independent banks are associated with lower and more stable π, there is no relationship b/w central bank independence and real economic activity. < Central bank independence= benefit of lower π w/o any apparent cost>
2. Inflation forecast targeting satisfies all 3 principles of monetary policy (output gap, Taylor Principle, Be forward looking) while making monetary policy more transparent for the public, which allows them to forecast more accurately and confidently.
3. There is no simple or compelling case for any macroeconomic policy observation. Each of the 7 readings proposed different arguments and/or problems that arise with certain stabilization policies arousing much debate between economists.
4. Even though economists are trying to design monetary policy to be more scientific, the making of a policy is not a science, it is a combintion of both science and art. Policy making will always need science as well as an artful 'touch' from an educated policy maker.
5. Instead of ignoring the output gap altogether, policymakers may want to focus on the gap in b/w the growth rate of output and the growth rate of trend output (the change in the output gap). This means that AD grows roughly at the expected rate of increase in AS.
- excessive inflation can result from ambitious output objects put forth by the Fed
- the Taylor Principal, which calls for a one-to-one increase of the real interest rate in response to inflation, causes an economic slowdown and brings the Fed bank back to its target interest rate
- inflation forecast targeting shrinks the duration of lags in policy implementation, allowing for low levels of inflation and stable output gaps
- transparency within the FOMC, through public press releases and the sharing of economic forecasts, lowers expected inflation causing a lower actual inflation rate
- the influence of government debt on the economy depends on the public's awareness of its affects in the future and the cost of incorporating those perceived affects into consumption habits
1. Inflation forecast targeting is a necessary policy framework tool for stabilizing inflation at low levels and stabilization of the output gap.
2. The level of the output gap should not be measured; policy makers would be better off focusing on the gap between the growth rate of output and the growth rate of trend output (change in the output gap).
3. Changes in Discretionary fiscal policies tend to be ineffective and influenced by lagging; discretionary fiscal policy should not be used as a stabilization process unless under emergencies (ex: interest rates fall below zero).
4. Commitment to a fixed policy rule will alleviate the problems of time inconsistency, provide credibility for the Fed, and result in favorable tradeoffs between inflation and unemployment.
5. Traditional and Ricardian views of government debt along with rational and adaptive models of consumer expectations should always be included to view the consumption effects of expansionary or contractionary fiscal policy
Data can be interpreted in different ways; the past does not provide definitive answers on how to solve present macroeconomic problems.
The lags in policymakers’ knowledge about the economy and in the consequences of policy changes significantly complicate Fiscal and Monetary policy decisions.
Policymakers need to decide if their main objective is to keep a low and steady inflation rate or is to maintain a given unemployment rate.
Some economists believe that when there is a decrease in taxes, even though government spending stays constant, GDP will largely be unaffected.
Recent fluctuations in the economy look much smaller than those in the past; this may be because of improvements in data collection or it may be a result of superior use of monetary policy.
1) The central bank should strive to stabilize output around potential this will decrease major shocks to the econonmy.
2) The main reason why fiscal policy incurs problems is becasue there is such a time lag for the reaction of the economy to the policy change.
2. Ricardian views causes a lot of confusion in the econonmy because it conflicts with the regular economist views.
3. Speed limit policies produce good outputs when the public expectation of inflation and output determines consumtion or investment.
4. An ideal solution would be to have a automatic stabilizer that mediates economic fluctuation through expectations.
5. The Fed must strive for consistency so that they can acquire the publics trust and the public can hold the Fed accountable for their actions.
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