Must-Read: John Taylor (2000): Reassessing Discretionary Fiscal Policy

Must-Read: This looked very good at the time. (I should know: I commissioned it, and strongly argued through the editorial process that it was an essential thing to publish–and Alan Krueger, Jim Hines, and Tim Taylor were more than eager to concur.) But today it looks a lot less smart:

John Taylor (2000): Reassessing Discretionary Fiscal Policy:

Recent changes in policy research and in policy-making call for a reassessment of countercyclical fiscal policy…

Countercyclical fiscal policy should focus on automatic stabilizers rather than discretionary actions. Monetary policy has been reacting more systematically to output and inflation; long expansions in the 1980s and 1990s demonstrate policy effectiveness. It is unlikely that discretionary countercyclical fiscal policy could improve things, even with less uncertainty about fiscal impacts. A discretionary countercyclical fiscal policy could make monetary policy making more difficult. Discretionary fiscal policy should focus on long-run issues, such as tax reform and social security reform.

Taylor, John B.. 2000. ‘Reassessing Discretionary Fiscal Policy.’ Journal of Economic Perspectives, 14(3): 21-36.
DOI: 10.1257/jep.14.3.21

Question: if you want to assign–and we may well want to–responsibility for stabilization policy to central banks, what passive support do they need more than our current automatic stabilizers and what additional active tools do they need in order to make it work well?

August 17, 2016

AUTHORS:

Brad DeLong
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