tag:blogger.com,1999:blog-2546602206734889307.post4512490233413315409..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Automatic Stabilisers and Discretionary Fiscal Policy Mainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-2546602206734889307.post-69244483331854021852012-06-09T14:47:04.294+00:002012-06-09T14:47:04.294+00:00This is more of a question than a statement, but w...This is more of a question than a statement, but when talking about stability and control, it is important to understand how PID control loops work, as Phillips discussed way back in the 50's, yet I don't see much discussion of control loops in discussing stabilization. For instance, the Taylor rule seems to completely ignore such issues. (Interesting IEEE paper on Phillips, PID loops and his hydro-mechanical 'Moniac' here.<br />http://oro.open.ac.uk/7942/<br /><br />Essentially, the PID loop in an autopilot or other stability control device requires an initial proportional input, sufficient to prevent further divergence, with an integrated additional correction to return the desired condition, followed by a derivative correction as the desired value is approached, to reduce oscillatory tendencies. Phillips said that if the overall system has a tendency to oscillate, "...the integral element in the policy should be made very weak or avoided entirely, unless it can be accompanied by sufficient derivative correction to offset the destabilizing effects..."<br /><br />By those guidelines, the overall US stimulus has just barely provided the initial proportional input, and there is very little integral element to return it to its initial condition. However, the political demands are to rapidly return to the desired economic conditions. The uneven stimulus/bailout to the financial sector has caused it to complete a rapid return to former levels, but now appear to be declining again. Given the current state of the US Congress, I don't think there is any hope of a rational policy/PID loop approach to either monetary or fiscal stimulus, and if Europe follows suit, the world economy, according to Phillips, is in for a real roller coaster ride.<br /><br />I've written a brief post about control, risk and economic policy, 'Hedging the Apocalypse' at http://somewhatlogically.com/?p=598 It also contains references and links to some work that I am doing in conjunction with the Dominican University to develop a simplified policy 'flight simulator' to look at the economic effects of environmental and resource policy, in conjunction with their Green MBA program. The work was very much inspired by Phillips model and the concept of stocks and flows, but uses a fluid dynamics analog. It turns out that fluid dynamics are very Keynesian.JR Hullshttp://somewhatlogically.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-33351405003947223882012-06-09T14:24:03.772+00:002012-06-09T14:24:03.772+00:00Simon: fair points. I think there is maybe a third...Simon: fair points. I think there is maybe a third argument for automatic stabilisers vs discretionary spending. I wouldn't put too much weight on it, but it's worth making. For the same aggregate level of spending, automatic stabilisers *prevent* a lot of micro-level disruptions in individual spending plans, while discretionary fiscal policy will *usually* *create* a lot of micro-level disruptions in individual spending plans. That's a supply-side argument, which is why I'm a bit wary of making it, but discretionary fiscal policy might cause an upward shift in the SRAS curve relative to automatic stabilisers.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-37717203853769113082012-06-09T14:09:53.157+00:002012-06-09T14:09:53.157+00:00Simon: "However, if it comes on stream when t...Simon: "However, if it comes on stream when the economy is back at the natural rate, then in principle the monetary authorities could offset its impact, and so firms today would be indifferent."<br /><br />I think that's probably right for firms, but it would be wrong for households, in a standard New Keynesian model. If G is expected to be higher when the economy is back at the natural rate, then C would be expected to be lower when the economy is back at the natural rate. The consumption-Euler equations then says that current C would be lower, for a given current r, which means it would make the recession worse. (You probably already know this.) So an increase in G that comes too late would be a bad thing.<br /><br />My guess is that J-P Benassy (who is a great macroeconomist) is assuming that the fiscal boost that comes too late will work to push the level of output *above* the natural rate (that it will not be offset by the central bank)?<br /><br />Of course you could comment on Nick and Scott ;-)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-44713299845187576162012-06-09T10:15:22.449+00:002012-06-09T10:15:22.449+00:00I think you are clearly right if the government sp...I think you are clearly right if the government spending comes on stream while monetary policy is constrained, and the economy is still underutilising resources. However, if it comes on stream when the economy is back at the natural rate, then in principle the monetary authorities could offset its impact, and so firms today would be indifferent. On Nick and Scott, I couldn't possibly comment!Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-81465959274698229712012-06-09T08:00:59.587+00:002012-06-09T08:00:59.587+00:00"...clearly there is no point stimulating the..."...clearly there is no point stimulating the economy after it has already recovered."<br /><br />That's not as clear as it looks, to me at any rate. If there is a fiscal rule such that the government always boosts the economy in a downturn, even though there is a significant lag, that ought to mean that slumps are less severe. An unexpected fall in leading indicators will prompt firms to plan for the inevitable boost which will follow "in due course, when the necessary formalities have been completed" etc. I got this idea from reading J-P Benassy's Money, Interest and Policy so I'm pretty sure it's respectable macro.<br /><br />That quibble aside, I'm glad to see somebody standing up for fiscal policy. I appreciate the blogging of Nick Rowe and Scott Sumner but their anti-fiscal stuff annoys me at times.Kevin Donoghuehttps://www.blogger.com/profile/07534540865029864916noreply@blogger.com