Modern perspectives on stabilisation policies
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Modern Perspectives on Stabilisation Policies. Jordi Galí CREI, UPF, CEPR and NBER. Norges Bank April 27, 2005. Two Keynesian Themes Revisited. The Social Waste of Recessions The Effectiveness of Fiscal Policy as a Stabilisation Tool.

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Modern Perspectives on Stabilisation Policies

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Modern Perspectives on Stabilisation Policies

Jordi Galí


Norges Bank

April 27, 2005

Two Keynesian Themes Revisited

  • The Social Waste of Recessions

  • The Effectiveness of Fiscal Policy as a Stabilisation Tool

A New Keynesian Perspective on the Welfare Costs of Fluctuations

  • Joint work with M. Gertler and D. López-Salido

  • Two Views on Economic Fluctuations

    • Neoclassical

    • Keynesian

The Gap

Efficiency Condition:

Common Distortions:


A Parametric Specification

Evidence on the U.S. Gap: 1960-2004

The Gap and the Wage Markup

Gap Fluctuations and Welfare



The Cost of Postwar Recessions

Non-Ricardian Consumers and the Effectiveness of Fiscal Policy

  • Joint work with D. López-Salido and J. Vallés

  • Recent Evidence (BP, FM):

     Contradicts predictions of RBC and NK models

The Effects of Government Spending Shocks

The GLV Model

  • NK Model with a Fraction of Non-Ricardian Households

  • NR Budget Constraint

  • Conditions for Positive Consumption Response

    • Large fraction of NR Households

    • Sufficient Price Stickiness

    • Limited Short Run Increase in Taxes

       satisfied under plausible calibrations

The Fiscal Multiplier, Welfare, and the Gap

  • Under what conditions will an increase in (wasteful) government spending raise welfare ?

    • sufficient underutilization of resources ( )

    • multiplier sufficiently greater than one

Has Fiscal Policy Been Stabilising in Practice?

  • Joint work with R. Perotti

  • Estimation of Fiscal Policy Rules

  • EMU, EU3, OECD5

  • Sample period: 1980-2002

Changes in Discretionary Fiscal Policy

Estimates of Output Gap Coefficient:

 increasingly countercyclical discretionary fiscal policies

Fiscal Policy in Recessions

 increasingly aggressive use of fiscal policy to fight recessions

Some Thoughts on a Quote

“We Are All Keynesians Now”

Richard Nixon, 1972

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