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Chapter 18. Stabilization Policy. Plus pages 435-36 on the Taylor Rule Homework page 538 1, 3a-c Link to syllabus. Recall Fig. 14-2, p. 405. Shifts in AD and Short Run Fluctuations. The big issue is how quickly the AS shifts left from AS1 to AS2. Rational Expectations
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Chapter 18. Stabilization Policy Plus pages 435-36 on the Taylor Rule Homework page 538 1, 3a-c Link to syllabus
Recall Fig. 14-2, p. 405. Shifts in AD and Short Run Fluctuations The big issue is how quickly the AS shifts left from AS1 to AS2. Rational Expectations theorists say it happens very quickly, thus countercyclical policy won’t change output nor employment much as the economy moves from A to C.
Fig. 10-12, 10-13, pp. 292, 295. Changes in AD Rational expectations school argues that if government policy causes a change in AD, and that is known, there will be an immediate shift in SRAS, and so Y (output; therefore employment/unemployment) will not change, as the economy goes straight from A to C. In other words, countercyclical policy is not needed.
Milton Friedman, 1912-2006 Monetarism Monetary Growth rule Consumption function (Introduced expectations into macro) Flexible exchange rates Leader of anti-government movement, which we see in rejection of discretionary policies, and preference for rules.
Bernanke’s testimony 11/16/05 In his first extended public appearance since President Bush nominated him to lead the Fed, Mr. Bernanke stoutly defended his proposal to base monetary policy on an explicit target for inflation and asserted that he would not weaken the central bank's "dual mandate" of promoting full employment as well as stable prices. And in describing his approach, he sharply distanced it from those of some central banks that focus almost exclusively on an inflation target and not at all on promoting growth. "I don't agree with that," Mr. Bernanke declared flatly When confronted with passages from a textbook he had written, in which he asserted that budget deficits tend to push up interest rates and "crowd out" private investments, he conceded that "it's possible" that tax cuts could cause more problems than they solve.
Figure 15-1, p. 436. Federal Funds Rate: Actual and Suggested Taylor Rule, p. 435: Fed. Funds rate = π + 0.5(π - 2.0) + 0.5 (Y - Ybar)
Robert Lucas Born 1937 in state of Washington Parents were leftist, blue collar, working class. Undergraduate major in history at U. of Chicago, where he has spent most of his academic career. Nobel Prize in 1995, primarily for work in Rational Expectations.
Thomas Sargent Born 1943 in Pasadena, California. B.A. at UC-Berkeley, Ph.D. Harvard, 1968 Nobel Prize, 2011 for his work in Rational Expectations (and related areas) Taught at Penn, Minnesota, Stanford, and is now at NYU. Describes himself as a Democrat, “a fiscally conservative, socially liberal Democrat,” adding, “I think that budget constraints are really central.” It’s important to consider the “incentive effects” of government policies, he continued. “There are trade-offs in efficiency and equality, and they lead to choices that aren’t easy,” he said. [NY Times]
Robert Barro, 1944- Undergrad at CalTech in physics, Ph.D. from Harvard. Taught for several years at Chicago, and now is at Harvard. Ex-columnist for Business Week. Known as proponent of “Ricardian Equivalence,” positing that government deficit spending will not increase aggregate demand, as people will reduce current spending to save up for eventual repayment of the government debt. (discussed in Chapter 19, pp. 554 ff). Not surprisingly, he is harshly critical of Keynesian countercyclical policies. Has recently switched to the study of the economics of religion and culture on the macroeconomy.
