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

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 Efficiency Condition: Common Distortions: Decomposition:

A Parametric Specification 

Evidence on the U.S. Gap:

The Gap and the Wage Markup

Gap Fluctuations and Welfare where Implications

The Cost of Postwar Recessions

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 Effects of Government Spending Shocks

The GLV Model  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  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?  Joint work with R. Perotti  Estimation of Fiscal Policy Rules  EMU, EU3, OECD5  Sample period:

Changes in Discretionary Fiscal Policy Estimates of Output Gap Coefficient:  increasingly countercyclical discretionary fiscal policies

Fiscal Policy in Recessions  increasingly aggressive use of fiscal policy to fight recessions

Some Thoughts on a Quote “We Are All Keynesians Now” Richard Nixon, 1972