What Does the Public Know about Economic Policy, and How Does It Know It?

opinion, policy, influence, politicians

The Consumer Price Index and the Measurement of Recent Inflation

macroeconomics, consumer price index, inflation

Measuring short-run inflation for central bankers - commentary

Inflation (Finance) ; Monetary policy ; Banks and banking, Central

Quantitative Easing: Entrance and Exit Strategies

Apparently, it can happen here. On December 16, 2008, the Federal Open Market Committee (FOMC), in an effort to fight what was shaping up to be the worst recession since 1937, reduced the federal funds rate to nearly zero.1 From then on, with all of its conventional ammunition spent, the Federal Reserve was squarely in the brave new world of quantitative easing. Chairman Ben Bernanke tried to call the Fed’s new policies credit easing, probably to differentiate them from what the Bank of Japan had done earlier in the decade, but the label did not stick.Recession, Federal Reserve, open market committee, banking policy, deflation, monetary policy

How Central Should the Central Bank Be?

About six years ago, I published a small book entitled The Quiet Revolution (Blinder 2004). Though its subtitle was Central Banking Goes Modern, I never imagined the half of it. Since March 2008, the Federal Reserve has gone post-modern with a bewildering variety of unprecedented actions that have either changed the nature and scope of the central bank’s role or stretched it beyond the breaking point, depending on your point of view. And that leads straight to the central question of this essay: What should--and shouldn’t--the Federal Reserve do?Federal reserve bank, monetary policy, central bank

The Challenge of High Unemployment

It is argued that policymakers, macroeconomists and microeconomists should all take high unemployment more seriously. The shortcomings of existing theories of unemployment are discussed, and a new definition of involuntary unemployment is proposed. A model is sketched in which falling aggregate demand leads to "Keynesian" unemployment because labor is heterogeneous and relative wages matter. Microeconomic theory is criticized for assuming away unemployment and, in the process, radically changing the answers to some basic questions in trade theory and public finance. Finally, some speculative explanations are offered for the low unemployment now found in states like New Jersey and Massachusetts.

Temporary Income Taxes and Consumer Spending

Both economic theory and casual empirical observation of the U.S. economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones, but neither provides much guidance about the magnitude of this difference. This paper offers new empirical estimates of this difference and finds it to he quite substantial. The analysis is based on an amendment of the standard distributed lag version of the permanent in-conic hypothesis that distinguishes temporary taxes from other income on the grounds that the former are "more transitory." This amendment, which is broadly consistent with rational expectations, leads to a nonlinear consumption function. Though the standard error is unavoidably large, the point estimate suggests that a temporary tax change is treated as a 50-50 blend of a normal income tax change and a pure windfall. Over a 1-year planning horizon, a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equal magnitude, and a rebate is estimated to have only about 38 percent of the impact.

The Case Against the Case Against Discretionary Fiscal Policy

Times change. When I was introduced to macroeconomics as a Princeton University freshman in 1963, fiscal policy and by that I mean discretionary fiscal stabilization policy was all the rage. The policy idea that would eventually become the Kennedy- Johnson tax cuts was the new, new thing. In those days, discussions of monetary policy often fell into the oh, by the way category, with a number of serious economists and others apparently believing that monetary policy was not a particularly useful tool for stabilization policy.1 The appropriate role for central bank policy was often said to be “accommodating” fiscal policy, which was cast in the lead role.2 Thus many people, probably including President Kennedy, thought that Walter Heller, who was then chairman of the Council of Economic Advisers, was more instrumental to stabilization policy than William McChesney Martin, who was then chairman of the Federal Reserve Board. Indeed, it was said that Kennedy only remembered that Martin was in charge of monetary policy by the fact that both words began with the letter M.

Inventories in the Keynesian Macro Model

An otherwise conventional Keynesian macro model is modified to include inventories of final goods by (1) drawing a distinction between production and final sales, and (2) allowing for a negative effect of the level of inventories on production. Two models are presented: one in which the labor market clears and one in which it does not. Both models are stable only if the negative effect of inventories on production is "large enough." Both models also imply that real wages move counter cyclically -- in direct contrast to the usual implication of Keynesian models. Detailed analysis of the market-clearing model show that there should be negative correlation between the levels of inventories and output, and between changes in inventories and changes in output, over the business cycle. However, inventory change should be positively correlated with the level of output.