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Wednesday, November 13, 2013

'Pushing on a String: US Monetary Policy is Less Powerful During Recessions'

I found a similar result long, long ago in a Journal of Econometrics paper:

Pushing on a string: US monetary policy is less powerful during recessions, by Silvana Tenreyro, Gregory Thwaites, Vox EU: Most industrialized countries have been trying to cut public borrowing without impeding recovery from the Great Recession. Central banks have attempted to square this circle by loosening monetary policy. For example, UK finance minister George Osborne has stated that “theory and evidence suggest that tight fiscal policy and loose monetary policy is the right macroeconomic mix” for countries with excessive private and public debt (Mansion House speech 2012).
A number of recent studies have found that fiscal policy is particularly powerful in recessions – tax hikes and spending cuts harm growth more when the economy is already weak (Auerbach and Gorodnichenko 2012, Jordà and Taylor 2013). But if monetary policy is still effective, these big negative effects could in principle be offset by lower interest rates. In our new paper (Tenreyro and Thwaites 2013) we find that, at least in the US, this is not the case: official interest rates have no discernible effect on the economy during recessions. This means a crucial ingredient – the ability to stimulate a recession-hit economy by cutting policy rates – may be missing from the prevailing policy mix. ...

    Posted by on Wednesday, November 13, 2013 at 08:26 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (28)


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