1. GROWTH AND CRISIS IN THE
Economics 1490
GROWTH AND CRISIS IN THE
WORLD ECONOMY
with
Professor Dale W. Jorgenson
Lecture 9: September 29, 2016
Fiscal Policy
Harvard University Department of Economics - Fall 2016

2. THE WORLD ECONOMY: GROWTH AND CRISIS
Lecture 9: September 29, 2016
Fiscal Policy
THE WORLD ECONOMY: GROWTH AND CRISIS
Comparing Economies across the World and over Time.
2. The Great Debate over the Financial and Economic Crisis.
3. The European Slowdown and the Crisis in Europe.
4. Asian Economic Miracles: Will They Continue?
5. Sustainability of Economic Growth.
6. World Economic Outlook.

3. THE GREAT DEBATE OVER THE FINANCIAL AND ECONOMIC CRISIS
Lecture 9: September 29, 2016
Fiscal Policy
THE GREAT DEBATE OVER THE FINANCIAL AND ECONOMIC CRISIS
6. The U.S. Financial Crisis.
7. Monetary Policy.
8. Financial Regulation: Micro-Prudential and Macro-Prudential.
9. Fiscal Policy.
10. Secular Stagnation.

4. SUPPLEMENTARY READINGS ON THE FISCAL POLICY
Lecture 9: September 29, 2016
Fiscal Policy
SUPPLEMENTARY READINGS ON THE FISCAL POLICY
Congressional Budget Office (2015), “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014,” February 20.
See:
Council of Economic Advisers (2014), “The Economic Impact of the American Recovery and Reinvestment Act of 2009 Five Years Later: Final Report to the Congress,” February. See:

5. TROUBLED ASSET RELIEF PROGRAM (TARP)
Lecture 9: September 29, 2016
Fiscal Policy
TROUBLED ASSET RELIEF PROGRAM (TARP)
Enacted by the U.S. Congress on October 3, 2008, and signed into law by President George W. Bush the same day.
Originally provided $700 billions for financial stability, but this was reduced to $475 billions by the Dodd-Frank legislation.
Only $430 billions were actually disbursed.
See:

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Fiscal Policy

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Fiscal Policy
Distributions (Billion)

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Fiscal Policy
Obama Economic Team

9. AMERICAN RECOVERY AND REINVESTMENT ACT
Lecture 9: September 29, 2016
Fiscal Policy
AMERICAN RECOVERY AND REINVESTMENT ACT
Estimated Macroeconomic Impact
Major Provisions of ARRA
Estimated Output Multipliers
Estimated Budgetary Costs

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14. GOVERNMENT SPENDING MULTIPLIER
Lecture 9: September 29, 2016
Fiscal Policy
GOVERNMENT SPENDING MULTIPLIER
In this paper we argue that the government-spending multiplier can be much larger than one when the nominal interest rate does not respond to an increase in government spending. We develop this argument in a model in which the multiplier is quite modest if the nominal interest rate is governed by a Taylor rule. When such a rule is operative, the nominal interest rate rises in response to an expansionary fiscal policy shock that puts upward pressure on output and inflation.
Christiano, Eichenbaum, and Rebelo,
“When Is the Government Spending Multiplier Large?” p. 79.

15. ZERO INTEREST RATE BOUND
Lecture 9: September 29, 2016
Fiscal Policy
ZERO INTEREST RATE BOUND
There is a natural scenario in which the nominal interest rate does not respond to an increase in government spending: when the zero lower bound on the nominal interest rate binds. We find that the multiplier is very large in economies in which the output cost of being in the zero-bound state is also large. In such economies it can be socially optimal to substantially raise government spending in response to shocks that make the zero lower bound on the nominal interest rate binding.
Christiano, Eichenbaum, and Rebelo,
“When Is the Government Spending Multiplier Large?” p. 79.

16. GOVERNMENT SPENDING MULTIPLIERS IN A NEW KEYNESIAN MODEL
Lecture 9: September 29, 2016
Fiscal Policy

17. GOVERNMENT SPENDING MULTIPLIERS IN A NEW KEYNESIAN MODEL
Lecture 9: September 29, 2016
Fiscal Policy

18. AMERICAN RECOVERY AND REINVESTMENT ACT
Lecture 9: September 29, 2016
Fiscal Policy
AMERICAN RECOVERY AND REINVESTMENT ACT
Despite the fiscal stimulus plan enacted in February 2009 (the American Recovery and Reinvestment Act), total government consumption rose by only 2 percent. Total government purchases, which include both consumption and investment, rose by even less. This result reflects two facts. First, a substantial part of the stimulus plan involved an increase in transfers to households. Second, there was a large fall in state and local purchases that offset a substantial part of the increase in federal government purchases.
Christiano, Eichenbaum, and Rebelo,
“When Is the Government Spending Multiplier Large?” p

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Fiscal Policy

20. SIMULATING THE ECONOMIC CRISIS
Lecture 9: September 29, 2016
Fiscal Policy
SIMULATING THE ECONOMIC CRISIS
To assess the model’s implication for the crisis period, we need to specify the shocks that made the zero bound binding. In our view the crisis was precipitated by disturbances in financial markets that increased the spread between the return on savings and the return on investment. The financial crisis and the resulting uncertainty led to a large rise in the household’s desire to save The Altig et al. model is not sufficiently rich to provide a detailed account of the financial crisis or the steep rise in household saving. We mimic the effects of the crisis by introducing the discount factor shock discussed in the previous sections, as well as a financial friction shock.
Christiano, Eichenbaum, and Rebelo,
“When Is the Government Spending Multiplier Large?” p. 116.

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23. NEW KEYNESIAN ANALYSIS OF THE ARRA: SUMMARY
Lecture 9: September 29, 2016
Fiscal Policy
NEW KEYNESIAN ANALYSIS OF THE ARRA: SUMMARY
Official Estimates by the Congressional Budget Office and the Council of Economic Advisers Are Based on Traditional Keynesian Multipliers.
The New Keynesian Model of Christiano, Eichenbaum, and Rebelo Generates Relatively Large Multipliers at the Zero Interest Rate Bound.
Although the Multiplier Is Large, Government Purchases of Goods and Services Are Small, So That the Impact of the ARRA Is Very Small.

24. WHY ARE GOVERNMENT PURCHASES
Lecture 9: September 29, 2016
Fiscal Policy
WHY ARE GOVERNMENT PURCHASES
SO SMALL?
Federal Government Purchases Are a Small Portion of the ARRA.
State and Local Purchases Were Slightly Reduced by the ARRA.
Most Federal Transfers to State and Local Governments Were Used to Reduce Government Borrowing (or Increase Government Net Lending)

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30. THE ECONOMIC IMPACT OF THE ARRA: SUMMARY
Lecture 9: September 29, 2016
Fiscal Policy
THE ECONOMIC IMPACT OF THE ARRA: SUMMARY
The Economic Impact of Fiscal Policy Depends on the Size of
Government Purchases and the Government Spending Multiplier
The Size of the Multiplier Is Large at the Zero Interest Rate Bound
Government Purchases, Both Federal and State and
Local Were Small.
The Impact of ARRA Was Very Modest.

31. THERE’S NO SUCH THING AS SHOVEL-READY PROJECTS
Lecture 9: September 29, 2016
Fiscal Policy
THERE’S NO SUCH THING AS
SHOVEL-READY PROJECTS