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"Stabilization policy"
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Monetary regimes and inflation : history, economic and political relationships
\"Exploring the characteristics of inflations and comparing historical cases from Roman times up to the modern day, this book provides an in depth discussion of the subject. It analyses the high and moderate inflations caused by the inflationary bias of poltiical systems and economic relationships, as well as the importance of different monetary regimes in containing them. The differences for the possible size of inflations among monetary regimes like metallic currencies, the gold standard and fiat paper money are discussed. It is shown that huge budget deficits of government have been responsible for all hyperinflations. This revised second edition debates whether a growth of the money supply exceeding that of real Gross Domestic Production is a necessary or sufficient reason for inflation and also includes a new concluding chapter, which explores the long-term tendencies to create, maintain and abolish inflation-stable monetary regimes. Moreover, the conditions for long-term inflation-stable monetary regimes in history are explored. By surveying thirty hyperinflations, Peter Bernholz demonstrates that certain economic traits have been stable characteristics of inflations over the centuries, and illustrates their causes. He also examines the consequences of high inflations for unemployment, the distortions between relative prices and the political conditions that allow a return to stable monetary regimes after high inflations, given the inflationary tendencies of political systems. This book will appeal to a wide-ranging audience, including students, economists, historians, political scientists and sociologists looking to imrpove their knowledge of monetary regimes and inflation. Bankers, businessmen and politicians attempting to solve the problems caused for them by inflation, will also find this to be a useful read\"--Back cover.
Book
Rethinking stabilization policies; Including supply-side measures and entrepreneurial processes
Traditional macroeconomic stabilization policies seek to moderate swings in economic activity through measures that primarily augment aggregate demand. Such measures are, however, inadequate in mitigating the comprehensive effects of crisis such as the COVID-19, which affects both the demand and supply sides of the economy. Moreover, monetary policies are presently close to a liquidity trap combined with weakened transmission links to the real economy. Fiscal policies have been reactivated, albeit in an ad hoc and experimental manner. Based on a literature review and the policy responses following the COVID-19 crisis, the objective is to present a modified and extended framework for stabilization policies. In particular, the importance of microeconomic supply-side measures that promote entrepreneurial processes and knowledge-upgrading efforts are emphasized. Furthermore, a coherent realigning of policies at the micro- and macro-levels is argued to enhance the potential for long-term growth and to facilitate the restructuring of an economy that normally follows a crisis.
The COVID-19 crisis makes traditional stabilization policies obsolete. Reinstate the market and redirect policy from interest rates and unconditional state support toward providing employees and firms with adequate knowledge for future challenges. Traditional crises policies seek to moderate swings in economic activity by primarily lowering interest rates and increase governmental expenditure to stimulate demand and economic activity. However, the effectiveness of both of these measures has been questioned, in particular, further reductions in already extremely low-interest rates. The present COVID-19 crisis has highlighted the importance of taking firms, entrepreneurs, trade, etc., into account, i.e., the supply side of the economy. It is argued that traditional policies should partly be replaced by measures targeting entrepreneurial processes, firm growth, innovation, and knowledge upgrading. Corporate taxes should be used to increase firms’ crisis resilience, increase investment, and encourage start-ups, while state support should be conditioned on employees engaging in knowledge upgrading. Hence, the main conclusion of this study is that such redirection of policies will more effectively level out swings in the business cycle, increase the potential for long-term growth, and make it easier for employees and firms to adjust to new economic conditions.
Journal Article
The political economy of fiscal consolidation in Japan
This book investigates the reasons for persistent public deficits and delayed fiscal reform in Japan, placing a special emphasis on political economy aspects. Japan is confronted with the need to pursue fiscal discipline for fiscal consolidation and implement structural reforms for reorganizing fiscal expenditures. Focusing on particular policy fields including social security, female labor supply, public works, and intergovernmental transfer schemes, the book clarifies economic and political elements that have hindered effective steps toward these two goals. Facing population aging and a business downturn, the Japanese government was urged to increase social security expenditures and the budget for Keynesian stimulus policies. As elucidated in the book, the institutional design has worked to over-represent the demands of elderly generations and local interest groups and to expand these expenditures. Rigorous theoretical and numerical analyses reported throughout the book consequently provide readers with insights into incentive designs and institutional reforms necessary for fiscal consolidation, also presenting points of view for public policy and public debate.
Book
Clearing Up the Fiscal Multiplier Morass
We quantify government spending multipliers in US data using Bayesian prior and posterior analysis of a monetary model with fiscal details and two distinct monetary-fiscal policy regimes. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Short-run output multipliers are comparable across regimes—posterior means around 1.3 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—90 percent credible sets of [1.5, 1.9] versus [0.1, 0.4] in present value, when estimated from 1955 to 2016.
Journal Article
Microeconomic Heterogeneity and Macroeconomic Shocks
In this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis of distributional issues, economic fluctuations, and stabilization policies—all within the same framework. In response to the limitations of the representative agent approach to economic fluctuations, a new framework has emerged that combines key features of heterogeneous agents (HA) and New Keynesian (NK) economies. These HANK models offer a much more accurate representation of household consumption behavior and can generate realistic distributions of income, wealth, and, albeit to a lesser degree, household balance sheets. At the same time, they can accommodate many sources of macroeconomic fluctuations, including those driven by aggregate demand. In sum, they provide a rich theoretical framework for quantitative analysis of the interaction between cross-sectional distributions and aggregate dynamics. In this article, we outline a state-of-the-art version of HANK together with its representative agent counterpart, and convey two broad messages about the role of household heterogeneity for the response of the macroeconomy to aggregate shocks: 1) the similarity between the Representative Agent New Keynesian (RANK) and HANK frameworks depends crucially on the shock being analyzed; and 2) certain important macroeconomic questions concerning economic fluctuations can only be addressed within heterogeneous agent models.
Journal Article
INEQUALITY, BUSINESS CYCLES, AND MONETARY-FISCAL POLICY
We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small-noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate shocks differ qualitatively from what they would be in a corresponding representative agent economy and are an order of magnitude larger. A motive to provide insurance that arises from heterogeneity and incomplete markets outweighs price stabilization motives.
Journal Article
Assessing TARP
We study the government equity infusions into banks under the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP). Strong banks opted out of CPP, and equity infusions were provided to banks that posed systemic risk and faced high financial distress costs but had strong asset quality. Concerns over executive compensation led banks to reject CPP infusions and exit the program. CPP infusions did not have meaningful certification effects, but the subsequent stress tests conducted for the major banks had significant certification effects. CPP equity infusions increased investor expectations regarding future regulatory interventions in the banking sector.
Journal Article
Central bank communication and stabilization policies under firms’ motivated beliefs
Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, we show that the presence of firms’ motivated beliefs has stark consequences for central banks’ optimal communication and stabilization policies. Under pure communication, motivated beliefs overweighting the accuracy of firms’ private information may reverse the bang-bang solution of transparency found in the literature under objective beliefs and lead to intermediate levels of communication. Similarly, when communication and stabilization policies are combined, motivated beliefs overweighting firms’ ability to process idiosyncratic information in general may reverse the bang-bang solution of opacity applying under objective beliefs, leading again to intermediate levels of communication and stabilization.
Journal Article
ON THE INTERNATIONAL SPILLOVERS OF US QUANTITATIVE EASING
This article analyses the effects of the Federal Reserve's quantitative easing (QE) on global portfolio flows, differentiating across recipient region of the flows, type of flow and QE rounds. Furthermore, the analysis differentiates between the impact of QE expansionary announcements and the actual market operations. The analysis shows that QE1 resulted in (slight) rebalancing towards the US, while QE2 and QE3 resulted in rebalancing towards non-US assets. This suggests that QE increased the procyclicality of flows outside the US, in particular into emerging market equities. The results also suggest a link between US macro-financial conditions and the transmission of QE to portfolio flows.
Journal Article