Quote Of The Day

“It seems to me that there are two ways of thinking about how monetary policy would react to fiscal stimulus.  One approach would be to ask:  “What is the optimal Fed response to fiscal stimulus?”  And the answer to that question is rather obvious; the Fed should act in such a way as to completely neutralize the impact of fiscal stimulus, i.e. make sure the multiplier is precisely zero.   This is because the Fed has some optimal level of expected AD growth in mind, and that level should not change just because fiscal policy changed.  So if the Fed is doing its job, which means if it is always targeting expected AD growth at what it sees as the optimal rate, then it will try to completely offset fiscal stimulus and the expected fiscal multiplier will be precisely zero.  That’s why fiscal stimulus almost disappeared from graduate textbooks in recent years.” — Scott Sumner, professor of economics at Bentley University, and monetary expert blogging on “The Silly Multiplier “debate”

1 Response to “Quote Of The Day”

  • A critical reading of the literature reveals several causes behind these diverse estimates.I think the size of fiscal multipliers depends, among other things, on leakages into saving and imports and on responses of monetary policy to the fiscal actions, all of which can differ across
    countries. Also, as a practical matter, some countries are more able than others to finance stimulative fiscal policy actions without causing real interest rates to rise.

Leave a Reply