Formerly About Advanced Micro Devices Message Board

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Politics : Formerly About Advanced Micro Devices

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To: tejek who wrote (525339)	11/4/2009 1:03:14 PM
From: TimF	1 Recommendation Read Replies (2) of 1577025

...One approach to answering this question is to examine the data using the techniques of time-series econometrics without imposing much a priori theory. For monetary policy, there is a large literature that does this; for fiscal policy, the literature is smaller but growing. The results from this exercise, however, do not always confirm the predictions from textbook Keynesian models. For example, here is the conclusion of Andrew Mountford and Harald Uhlig (a prominent econometrician now at the University of Chicago) in an empirical study called "What are the Effects of Fiscal Policy Shocks?": Our main results are that * a surprise deficit-financed tax cut is the best fiscal policy to stimulate the economy * a deficit[-financed government] spending shock weakly stimulates the economy. * government spending shocks crowd out both residential and non-residential investment without causing interest rates to rise ... gregmankiw.blogspot.com ... ..we find that both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is consistent with a neoclassical model with distortionary taxes, but more difficult to reconcile with Keynesian theory: while agnostic about the sign, Keynesian theory predicts opposite effects of tax and spending increases on private investment. This does not appear to be the case. There is much more here and do read the whole thing. The bottom line is that the evidence for the Keynesian effects of fiscal policy is far from overwhelming. Keynesian results cannot be ruled out but we simply don't understand the short-run dynamics of cycles very well. So why should we be so convinced it is time to spend $1 trillion or more?... marginalrevolution.com

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