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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

Modern Perspectives on Stabilisation Policies

Jordi Galí


Norges Bank

April 27, 2005

Two keynesian themes revisited
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
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
The Gap Fluctuations

Efficiency Condition:

Common Distortions:


A parametric specification
A Parametric Specification Fluctuations

Gap fluctuations and welfare
Gap Fluctuations and Welfare Fluctuations



Non ricardian consumers and the effectiveness of fiscal policy
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 glv model
The GLV Model Policy

  • 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
The Fiscal Multiplier, Welfare, and the Gap Policy

  • 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
Has Fiscal Policy Been Stabilising in Practice? Policy

  • Joint work with R. Perotti

  • Estimation of Fiscal Policy Rules

  • EMU, EU3, OECD5

  • Sample period: 1980-2002

Changes in discretionary fiscal policy
Changes in Discretionary Fiscal Policy Policy

Estimates of Output Gap Coefficient:

 increasingly countercyclical discretionary fiscal policies

Fiscal policy in recessions
Fiscal Policy in Recessions Policy

 increasingly aggressive use of fiscal policy to fight recessions

Some thoughts on a quote
Some Thoughts on a Quote Policy

“We Are All Keynesians Now”

Richard Nixon, 1972