Monday, July 7, 2014

john taylor

experiences from the 1970s raise serious doubts about the political and operational feasibility of  discretionary fiscal policy.

In a simple Keynesian model, all the government has to do to combat a recession is quickly increase government purchases,

 but the difficulty with doing so in practice is one of the classic arguments against discretionary fiscal policy.

" Small or unreliable multipliers, the legacy of increased debt, the unpredictability and temporariness of such policies are some of the other arguments. Using dynamic models with expectations and incentives, I have found very small multipliers (around .5)

For these reasons I argued in the November 2008 article which Krugman cites that a better fiscal policy would be to rely on the automatic stabilizers and enact more permanent reductions in tax rates (or at least pledge not to increase tax rates in a recession).