Article reading and question

Third Question Cluster

August 24, 2014

1. What was the state of knowledge that many economists would have had pre-2008 about the usefulness of activist fiscal policy?

(a) What was there concern about the timing of fiscal policy?

(b) What were the concerns about a micro-managed fiscal policy? What was Lucas’s concern about fiscal policy? What is Ricardian equivalence?

(c) How did the fiscal responses to the last three pre-2008 recessions differ?

2. How have projects to identify individual channels by which stimulus work added to our understanding of stimulus?

(a) What is meant by the direct vs. indirect effects of stimulus?

(b) What is the implication for a multiplier above one? How about a multiplier between zero and one?

(c) What types of policy attempt to produce stimulus by increasing consumption? How have the affects of these policies been mea- sured?

i. What features of a tax cut effect its ability to function as stimulus?

(d) How do economists estimate the effectiveness of attempts to stim- ulate business investment? Why is this more difficult than cap- turing the affects of stimulus on consumption?

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3. What are the three approaches used to capture the effects on stimulus on the whole economy?

(a) Explain the general idea behind a VAR. What is the VAR method for estimating the size of a multiplier? Give a flavor for the results have been found from this approach? What are the drawbacks of the VAR approach?

(b) What is the narrative method? What are the advantages/disadvantages of this method? What results have been found from this method?

(c) What is the DSGE (Dynamic stochastic general equilibrium) method?

i. What is the advantage of this method over the VAR ap- proach?

ii. What are the frequently listed disadvantages with this result? Why do results tend to be sensitive to parameter choices?

iii. What conclusions have been found using this approach?

iv. Explain the economic significance of the zero lower bound. Why might the zero lower bound increase the multiplier? Why might large public debts affect the measurement of the multiplier?

4. Explain what is meant by the ARRA? What were its key components. How does Table 2.1 allow us to study the effectiveness of the stimulus?

(a) Why do the authors list criticism of the plan as pertaining to whether the plan is sufficiently timely, targeted, and temporary.

(b) How does Figure 1 help us understand the affects of the stimulus? How was the figure created?

(c) Why are these estimates bigger than the estimates of some of the stimulus’s critics? What are the differences in assumptions between these two groups?

(d) How did the stimulus affect the long term debt picture?

(e) What do the authors believe about the timing of the stimulus?

(f) What outside information did the administration use to bolster the case the stimulus improved employment?

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5. What conclusions should be drawn from the experience with stimulus in the future?

(a) What conclusions can be made about stimulus design?

(b) What conclusions should be made about future research?

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