Tag: Antonio Fatas

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations

Posted on by Brad DeLong

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…

..At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations

Posted on by Brad DeLong

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…

…At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Must-read: Antonio Fatas: “A 2016 Recession Would Be Different”

Posted on by Brad DeLong

Must-Read: “The years that the locust hath eaten, the cankerworm, and the caterpiller, and the palmerworm…” –Joel 2:25 (KJV). The task of fiscal and monetary policymakers as of the start of 2009 was (1) to arrest the slide, (2) to trigger a strong recovery, and (3) to set the world economy in a situation in which future policymakers would have the room to maneuver so that future substantial adverse macroeconomic shocks–and there would be future substantial adverse macroeconomic shocks–could be neutralized. They (probably) accomplished (1), they (certainly) failed at (2), and they continue to fail at even starting at (3)–and the fact that it is now seven years and they have not even started this task somehow fails to exercise them:

Antonio Fatas: A 2016 Recession Would Be Different: “1. The Yield curve would be very steep…

…2. The real federal funds rate (or the ECB real repo rate) would be extremely low…. 3. And nominal central bank interest rates would be stuck at zero…. So maybe this tells us that a recession is not about to happen. But if it is, the lack of space to implement traditional monetary policy tools should be a big concern for policy makers. If a recession ends up happening, helicopter money will likely become a policy option.

Must-read: Antonio Fatas: “BIS Redefines Inflation (Again)”

Posted on by Brad DeLong

Must-Read: I agree with Antonio Fatas here. The BIS is using model-building 0% as a discovery mechanism and 100% to advance reasons for policy conclusions that have been set in stone in advance. The problem is that the various BIS models do not appear to codify any form of knowledge–for as their predictions are proved false by time the responses not to adjust the framework to reality but to put forward to a new framework. The latest such:

Antonio Fatas: BIS Redefines Inflation (Again): “An interview with Hyun Song Shin…

…reminds us of the strange and heterodox views that the BIS (and others) have about the behavior of inflation… a very special and radical view on what determines inflation… supported by a unique reading of the data…. Here is a summary of the new BIS theory…. 1. Inflation is a global phenomenon, not a national one. Monetary policy has very little influence on inflation…. 2. The idea that monetary policy affects demand and possibly inflation is a ‘short-term’ story that is too simple…. 3. Deflation is not that bad…. 4. While central banks are powerless at controlling domestic inflation, they are very powerful at distorting interest rates and rates of returns for long periods of time (decades). 5. Central banks have a problem when inflation is the only goal (they end up creating distortions in financial markets). 6. Monetary policy is a cause of all China’s problems (he admits that there are other causes as well).

In summary, central banks are evil. Their only goal is to control inflation, but they cannot really control it, and because of their superpowers to distort all interest rates they only end up causing volatility and crises. And this is coming from an organization whose members are central banks and its mission is ‘to serve central banks’. Surreal.

We see this more and more with economists who try to come over to macro from modern finance. They base themselves not in Mill-Malthus or Wicksell-Keynes or Bagehot-Minsky or Fisher-Friedman, but evolve some approach of their own which usually seems to combine the errors of the early Say and of Hayek to produce sub-Econ-1-level fallacies…

Must-Read: Antonio Fatas: The Missing Lowflation Revolution

Posted on by Brad DeLong

Antonio Fatas: The Missing Lowflation Revolution: “It will soon be eight years since the US Federal Reserve decided to bring its interest rate down to 0%…

…In these eight years central banks have used all their available tools to increase inflation closer to their target and boost growth with limited success. GDP growth has been weak or anemic, and there is very little hope that economies will ever go back to their pre-crisis trends…. Very few would have anticipated… that central banks cannot lift inflation rates closer to their targets over such a long horizon… that a crisis can be so persistent and that cyclical conditions can have such large permanent effects on potential output… the slow (or inexistent) natural tendency of the economy to adjust by itself to a new equilibrium. To be fair… we had been warned about this by those who had studied the Japanese experience: both Krugman and Bernanke, among others…. But my guess is that even those who agreed with this reading of the Japanese economy would have never thought that we would see the same thing happening in other advanced economies….

It might be time to rethink our economic policy framework. Some obvious proposals include raising the inflation target and considering “helicopter money” as a tool for central banks. But neither of these proposals is getting a lot of traction. My own sense is that the view among academics and policy makers is not changing fast enough…. The comparison with the 70s when stagflation produced a large change in the way academic and policy makers thought about their models and about the framework for monetary policy is striking…. How many more years of zero interest rate will it take to witness a similar change in our economic analysis?