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Chapter 5 - Macroeconomic Policy Debates
Chapter 5 - Macroeconomic Policy Debates
CHAPTER
Stabilization Policy
N. GREGORY MANKIW
PowerPoint® Slides by Ron Cronovich
© 2008 Worth Publishers, all rights reserved
In this chapter, you will learn…
Should
Should policy
policy be
be active
active or
or
passive?
passive?
Average 4
growth
rate 2
-2
-4
1970 1975 1980 1985 1990 1995 2000 2005
Increase in unemployment during
recessions
increase in no. of
peak trough unemployed persons
(millions)
July 1953 May 1954 2.11
Aug 1957 April 1958 2.27
April 1960 February 1961 1.21
December 1969 November 1970 2.01
November 1973 March 1975 3.58
January 1980 July 1980 1.68
July 1981 November 1982 4.08
July 1990 March 1991 1.67
March 2001 November 2001 1.50
CHAPTER 14 Stabilization Policy slide 5
Arguments for active policy
IfIf conditions
conditions change
change before
before policy’s
policy’s impact
impact is
is felt,
felt,
the
the policy
policy may
may destabilize
destabilize the
the economy.
economy.
CHAPTER 14 Stabilization Policy slide 7
Automatic stabilizers
definition:
policies that stimulate or depress the economy
when necessary without any deliberate policy
change.
Designed to reduce the lags associated with
stabilization policy.
Examples:
income tax
unemployment insurance
welfare
CHAPTER 14 Stabilization Policy slide 8
Forecasting the macroeconomy
-5
(see p.258 ).
-10
1960 1962 1964 1966 1968 1970
source of LEI data: Leading Economic Indicators
The Conference Board Real GDP
-5
-10
-15
1990 1992 1994 1996 1998 2000 2002
source of LEI data: Leading Economic Indicators
The Conference Board Real GDP
4.0
Standard deviation
Volatility
3.5
3.0 of GDP
2.5
2.0
1.5
1.0
Volatility of
0.5
Inflation
0.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Should
Should policy
policy be
be conducted
conducted by
by
rule
rule or
or discretion?
discretion?
1. To encourage investment,
govt announces it will not tax income from capital.
10 Actual
2 Taylor’s Rule
0
1987 1990 1993 1996 1999 2002 2005
CHAPTER 14 Stabilization Policy slide 33
Central bank independence