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

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


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:

Decomposition:


A Parametric Specification


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


The Gap and the Wage Markup


Gap Fluctuations and Welfare

where

Implications


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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