Institutional Affiliation: John E. Walker Dept. of Economics Clemson Universi
|Are Countercyclical Fiscal Policies Counterproductive?|
with Eric M. Leeper: w11869
Economists generally believe that countercyclical fiscal policies have stabilizing effects that work through automatic stabilizers and discretionary actions. Analyses underlying this conventional wisdom focus on intratemporal margins: how employment and personal income respond in the short run to changes in government expenditures and taxes. But in economic downturns, countercyclical policies increase government indebtedness, raising future debt service obligations. These new expenditure commitments must be financed by some mix of higher taxes, lower spending, or higher money growth in the future. Expectations of how future policies will adjust change current savings rates and the efficacy of countercyclical policies. It is thus possible for responses to expected future policies to exacerb...
|The Price Level, the Quantity Theory of Money, and the Fiscal Theory of the Price Level|
with Eric M. Leeper: w9084
We consider price level determination from the perspective of portfolio choice. Arbitrages among money balances, bonds, and investment goods determine their relative demands. Returns to real balance holdings (transactions services), the nominal interest rate, and after-tax returns to investment goods determine the relative values of nominal and real assets. Since expectations of government policies ultimately determine the expected returns to both nominal and real assets, monetary and fiscal policies jointly determine the price level. Special cases of the fiscal and monetary policies considered produce the quantity theory of money and the fiscal theory of the price level.
Published: Gordon, David B. and Eric M. Leeper. "The Price Level, The Quantity Theory Of Money, And The Fiscal Theory Of The Price Level," Scottish Journal of Political Economy, 2006, v53(1,Feb), 4-27. citation courtesy of
|Rules, Discretion and Reputation in a Model of Monetary Policy|
with Robert J. Barro: w1079
In a discretionary regime the monetary authority can print more money and create more inflation than people expect. But, although these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their expectations accordingly. Because the policymaker has the power to create inflation shocks ex post, the equilibrium growth rates of money and prices turn out to be higher than otherwise. Therefore, enforced commitments (rules) for monetary behavior can improve matters. Given the repeated interaction between the policymaker and the private agents, it is possible that reputational forces can substitute for formal rules.Here, we develop an example of a reputational equilibrium where the out-comes turn o...
Published: Barro, Robert J. and David B. Gordon. "Rules, Discretion and Reputation ina Model of Monetary Policy." Journal of Monetary Economics, Vol. 12, No. 1,(July 1983), pp. 101-121. citation courtesy of
|A Positive Theory of Monetary Policy in a Natural-Rate Model|
with Robert J. Barro: w0807
Natural-rate models suggest that the systematic parts of monetary policy will not have important consequences for the business cycle. Nevertheless, we often observe high and variable rates of monetary growth, and a tendency for monetary authorities to pursue countercyclical policies. This behavior is shown to be consistent with a rational expectations equilibrium in a discretionary environment where the policymaker pursues a "reasonable" objective, but where precommitments on monetary growth are precluded. At each point in time, the policymaker optimizes subject to given inflationary expectations, which determine a Phillips Curve-type tradeoff between monetary growth/inflation and unemployment. Inflationary expectations are formed with the knowledge that policymakers will be in this situat...
Published: Barro, Robert J., and David B. Gordon. "A Positive Theory of Monetary Policy in a Natural-Rate Model." Journal of Political Economy, Vol. 91. No. 4 (August 1983), pp. 589-610. Journal of Economic Literature, Vol. 22, No. 1,(March 1984). citation courtesy of