tag:blogger.com,1999:blog-2546602206734889307.post3604844296155257715..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Offsetting private sector financial balances with fiscal policyMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-2546602206734889307.post-42766562986062296402012-11-23T23:28:48.063+00:002012-11-23T23:28:48.063+00:00"Or correctly designed and powerful automatic...<i>"Or correctly designed and powerful automatic stabilisers."</i><br /><br />Okay, but I believe Prof. Wren-Lewis was talking about cases in which the business cycle was not a factor, so in those cases automatic stabilizers would not be particularly relevant.<br /><br /><i>No it doesn't affect the interest rate. The interest rate is always exactly where the central bank wants it to be. They set the rate.</i><br /><br />Right, but you seem to have missed the part where I said "...prompting a monetary response." Again, my reading of Wren-Lewis' post is that he is mainly focused on the fiscal response when there is no cyclically adjusted surplus or deficit. And that's fine. But I don't think you can <i>just</i> talk about the fiscal side because the monetary authority will almost always respond in some way.<br /><br />2slugbaitsnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-10701477620995527622012-11-23T17:59:26.385+00:002012-11-23T17:59:26.385+00:00"If the private sector surplus/deficit is exp..."If the private sector surplus/deficit is expected to be transient, then a fiscal response might be mistimed unless we assume prescient politicians"<br /><br />Or correctly designed and powerful automatic stabilisers. <br /><br />"If the government pays down existing debt, then presumably this will have an effect on the interest rate prompting a monetary response."<br /><br />No it doesn't affect the interest rate. The interest rate is always exactly where the central bank wants it to be. They set the rate.<br /><br />And let's put to bed once and for all the myth that the central bank is in anyway independent of government. NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-78818579879062515162012-11-23T14:58:36.374+00:002012-11-23T14:58:36.374+00:00There is also the problem of mistimed fiscal actio...There is also the problem of mistimed fiscal action. I don't know about the UK, but in the US fiscal actions have a habit of kicking-in (or fading out) at just the wrong time. If the private sector surplus/deficit is expected to be transient, then a fiscal response might be mistimed unless we assume prescient politicians (remember...in the US half of them believe Adam and Eve rode around on the backs of dinosaurs). This is one answer to commenter Ralph Musgrave's question regarding why monetary policy is generally better than fiscal policy.<br /><br />But even if we ignore the fiscal timing issue, what about the second order effects? Let's take the natural resources example in which the private sector runs a temporary deficit while setting up the extraction infrastructure, thereby prompting the fiscal authorities to run a temporary government surplus. What should the government do with these surplus revenues? If the government pays down existing debt, then presumably this will have an effect on the interest rate prompting a monetary response. 2slugbaitsnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-74585921560341509702012-11-23T10:59:44.772+00:002012-11-23T10:59:44.772+00:00“If the government has a fixed debt to GDP target…...“If the government has a fixed debt to GDP target…” Only a lunatic government would aim for such a target. As Keynes said, “Look after unemployment, and the budget looks after itself”. I.e. look after unemployment, and you’ll find the debt (and/or monetary base) expands some years and contracts in others. That’s just numbers coming out in the wash. Ignore them.<br /><br />Next, I like the way Prof Simon says that “There is a general consensus that in stabilising the business cycle, monetary policy should take the lead…” and then cites an example of where that policy falls flat on its face (an asset price bubble scenario).<br /><br />If there’s a housing bubble, then it seems obvious to me that the authorities should try to ameliorate it with raised interest rates, while using fiscal to maintain demand at the full employment level. <br /><br />So to answer Prof Simon’s question, “does monetary policy have any superiority over fiscal instruments?”, my answer is “no”. In fact I set out numerous reasons why monetary policy is ******* (insert expletive of your choice). See:<br /><br />http://ralphanomics.blogspot.co.uk/2012/03/sixteen-reasons-why-mmt-is-right-on.html<br /><br />Will someone please set out a similarly brief and cogent reasons as to why monetary is better than fiscal?<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-26308477759422271612012-11-23T09:14:28.267+00:002012-11-23T09:14:28.267+00:00First and foremost, the Fed should have intervened...First and foremost, the Fed should have intervened to prick the housing bubble. Interest rate hikes may have been too blunt of a tool, but there were other options. Specifically, if Greenspan had directed the public's attention to the bubble through public speeches and through the research coming out of the Fed during the 2002-05 period, then the bubble would have deflated itself -- MP is all about expectations. In this scenario, where the Fed is so ignorant to an $8 trillion bubble, the collapse of which has the potential to ruin tens of millions of lives, the fiscal authorities should probably step in. JSeydlhttp://www.jseydl.com/category/economics/noreply@blogger.com