Fiscal multipliers and policy coordination
This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending ...
Both sides of the pork trough
Earmarks are easy to want, easier to criticize. Though inefficient at a number of levels, the political economy of pork barrel spending suggests some benefits are also ignored.
Can the nation stimulate its way to prosperity?
The Federal Reserve and Congress responded to the most recent financial crisis with measures to unclog credit channels, shore up the faltering housing market and provide breathing space for large, interconnected financial firms on the verge of collapse. Amid the turmoil came fiscal actions--notably the American Recovery and Reinvestment Act, the fiscal stimulus plan signed into law in February 2009 by President Obama. Passage of the stimulus plan was accompanied by a mix of great expectations and controversy. Christina Romer, incoming head of the Council of Economic Advisers at the time, ...
Macroeconomic dynamics near the ZLB: a tale of two equilibria
This paper studies the dynamics of a New Keynesian dynamic stochastic general equilibrium (DSGE) model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targeted-inflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targeted-inflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 2008-09 recession under the assumptions that the U.S. economy has been in either the targeted-inflation or the sunspot equilibrium. We consider ...
A Bayesian approach to estimating tax and spending multipliers
This paper outlines a simple Bayesian methodology for estimating tax and spending multipliers in a dynamic stochastic general equilibrium (DSGE) model. After forming priors about the parameters of the model and the relevant shock, we used the model to exactly match only one data point: the trough of the Great Depression, that is, an output collapse of 30 percent, deflation of 10 percent, and a zero short-term nominal interest rate. Because we form our priors as distributions, the key economic inference of our analysis--the multipliers of tax and spending--are well-defined probability ...
Correlated disturbances and U.S. business cycles
The dynamic stochastic general equilibrium (DSGE) models used to study business cycles typically assume that exogenous disturbances are independent first-order autoregressions. This paper relaxes this tight and arbitrary restriction by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to allow for feasible and quick estimation of DSGE models with correlated disturbances. Our second contribution is a reexamination of U.S. business cycles. We find that ...
The American Recovery and Reinvestment Act of 2009: a review of stimulus spending in New York and New Jersey
The ARRA stimulus package was designed to spur economic and employment growth in response to a deepening U.S. recession and the weakened fiscal conditions of many state governments. An analysis of the local allocation of ARRA funds shows that the $35 billion of stimulus spending in New York was relatively concentrated in expanded funding for Medicaid, while a large share of the $12 billion allocated to New Jersey went to extending unemployment insurance benefits. While ARRA funding supplemented tax revenues in both states in fiscal years 2010 and 2011, the program's spending components are ...
Deficits, public debt dynamics, and tax and spending multipliers
Cutting government spending on goods and services increases the budget deficit if the nominal interest rate is close to zero. This is the message of a simple but standard New Keynesian DSGE model calibrated with Bayesian methods. The cut in spending reduces output and thus?holding rates for labor and sales taxes constant?reduces revenues by even more than what is saved by the spending cut. Similarly, increasing sales taxes can increase the budget deficit rather than reduce it. Both results suggest limitations of ?austerity measures? in low interest rate economies to cut budget deficits. ...
The outlook, policy choices and our mandate
Remarks at the at the Society of American Business Editors and Writers Fall Conference, City University of New York, Graduate School of Journalism, New York City.
The national and regional economic outlook
Remarks at the University at Albany, Albany, New York.