Impacto de los niveles del Ag-SCC Pre-tratamiento en la SLFL, SLE y

Today’s conventional wisdom holds that discretionary changes in fiscal policy are unlikely to do much good, and might even do harm. Why is that? Because the lags in fiscal policy, especially the inside lags, are long—perhaps longer than the duration of a

typical recession. Because the most plausible fiscal policy weapon, changes in personal income taxes (or transfer payments), is likely to be weakened by deploying it on a temporary basis. And because an obviously superior stabilization weapon—namely, monetary policy—is readily available.41

When might that argument go wrong? Well, to begin with, there will occasionally be times and places—such as Japan in the 1990s—where the need to boost aggregate

demand is extremely large and lasts a very long time, longer than any conceivable lags in fiscal policy. Models with hysteresis offer extreme examples of this possibility, but a model with a maximum root of 0.98 or so will do almost as well. And remember, Stock and Watson (1999) estimated the maximum root for real GDP in the United States to be between 0.96 and 1.10.

Second, there are institutional structures that can make the inside lags in fiscal policy quite short. The U.K.’s parliamentary system legislates fiscal changes very quickly, and even the U.S. Congress has shown itself capable of moving within a few months—on occasion! It may be that we generalized too glibly from the terribly long inside lags witnessed in 1968 and 1974. Furthermore, if we really want to speed up fiscal policy decisionmaking, there are a variety of institutional changes that could help.

Third, to the extent that we are worried that low MPCs out of temporary income tax changes will undermine the effectiveness of fiscal policy, there are (non-income) tax options that can induce intertemporal substitution by reducing current prices relative to future prices—for both consumer goods and investment goods.

41 _{In summarizing the case against fiscal stabilization, Feldstein (2002) added one further item to this list:}

the possibility that tax cuts or expenditure increases can depress demand by raising long-term interest rates. But he did not suggest that tax increases or expenditure cuts can stimulate the economy by lowering interest rates.

Fourth, but these more exotic options may not even be needed, for a fascinating body of recent econometric evidence suggests that a sizable fraction of the U.S. population (even weighted by income) is, or acts as if it is, subject to binding liquidity constraints. Thus, even explicitly temporary changes in income taxes may pack significant spending punch. Furthermore, with a little ingenuity we can target tax cuts on people who are more likely to be living hand to mouth, such as poor people and the unemployed. Fifth, there will occasionally be extraordinary circumstances—contemporary Japan is again the outstanding example—where the zero bound on nominal interest rates makes monetary policy a less powerful instrument of stabilization than it usually is. In such a situation, monetary policy alone may be too weak to do the job, and a combined

monetary-fiscal effort—deficit spending or tax cuts financed by printing money—may be needed. Indeed, fiscal policy might well be the senior member of such a partnership, since a liquidity trap not only reduces the power of monetary policy but also increases the power of fiscal policy (because there is little or no “crowding out” from higher interest rates). Precisely this sort of two-pronged stabilization policy is what many economists long urged on Japan.

Sixth, in certain rare “emergencies”—such as the U.S. in the aftermath of the 9/11 attacks—the monetary policy medicine may simply be too slow-acting to provide a timely cure. The inside lags in monetary policy would probably be negligible in a clear emergency.42 But the outside lags remain quite long—a year or more for real GDP, and two years or more for inflation—and there is not much the Federal Reserve can do about it. With monetary policy lags as long as that, fiscal policy may be the only cyclical medicine that can work in time—provided (and this is truly a big “if”) the inside lags can

be kept short. In fact, in the end, I am inclined to conclude that the long inside lags (with the concomitant politics) constitute the most important count in the indictment against fiscal policy.

So my overall conclusion runs something like this. Under normal circumstances, monetary policy is a far better candidate for the stabilization job than fiscal policy. It should therefore take first chair. Nothing in this paper is intended to dispute this piece of conventional wisdom. That said, however, there will be occasional abnormal

circumstances in which monetary policy can use a little help, or maybe a lot, in

stimulating the economy—such as when recessions are extremely long and/or extremely deep, when nominal interest rates approach zero, or when significant weakness in aggregate demand arises abruptly.43 To be prepared for such contingencies, it makes sense to keep one or more fiscal policy vehicles tuned up and parked in the garage, and perhaps even to adopt institutional structures that make it easier to pull them out and take them for a spin when needed.

43 _{As previously noted, I see little hope that fiscal policy can be used effectively in the contractionary}

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