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what was the main consensus around economic policy during the Great Moderation?
using MP over FP was better for stabilizing the economy; acknowledgment of policy constraints due to NAIRU + the political business cycle
IMPORTANT INFO: 5 main questions about macroeconomic policy + answers from different economic groups
fiscal stimulus
expansionary FP (lower taxes, increase spending)
arguments made by supporters of fiscal stimulus
MP can’t be used due to liquidity trap
concerns about an increasing IR won’t happen due to the severity of the economy’s depression
the economy will be depressed for a while, so concerns about how long this may take are solved
arguments made by opponents of fiscal stimulus
Ricardian equivalence
there will be an increasing long-term IR since spending programs lead to reduced faith in the govt.’s ability to repay debts
Ricardian equivalence
individuals and firms see an increase in govt. spending as a sign that taxes will rise in the future, leading to a decrease in private spending
doctrine of “expansionary austerity”
a decrease in govt. spending will increase private-sector confidence, leading to increased output and employment
