Empirical Evidence on the Effects of Stabilization Policy
Laurence H. Meyer and Robert H. Rasche begin with a survey of monetary and fiscal multipliers, which are examined both across various large-scale macroeconometric models and simple reduced forms, and over time, to assess the degree of consensus and the nature of the evolution in policy multipliers as the various macroeconometric models have been refined. The authors give special attention to the difference in estimated fiscal policy multipliers between the-large scale income-expenditure econometric models, on the one hand, and the St. Louis reduced-form equation on the other hand. The authors then develop the implications of both the large-scale income-expenditure models and smaller monetarist models for the two issues highlighted in John Taylor’s presentation: the cumulative output loss associated with anti-inflation policies and the gains from policy activism. They contrast the large cumulative output losses implicit in both conventional estimated Phillips curve equations and monetarist models with the implications of rational expectation macro models. Meyer and Rasche note, however, the importance of balancing the gains from reducing inflation against the transitional costs associated with reducing inflation. They conclude with a survey of empirical evidence on the gains to policy activism, based on model simulations which compare the simulated performance of the economy under fixed rules, ad hoc rules with feedback, and optimal control.