economics 1490 growth and crisis in the world economy with professor dale w. jorgenson lecture 06:...
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Economics 1490GROWTH AND CRISIS IN THE
WORLD ECONOMY with
Professor Dale W. Jorgenson
Lecture 06: September 22, 2015
The Great ModerationHarvard University Department of Economics - Fall 2015
Lecture 06: September 22, 2015The Great Moderation
Course Outline
1. Introduction
2. U.S. Financial and Economic Crisis.
3. Europe and the U.S.: Convergence and Divergence.
4. Asian Economic Miracles.
5. Sustainability of Economic Growth.
6. Outlook for the World Economy.
U.S. Financial and Economic Crisis
6. The Great Moderation.
7. The U.S. Financial Crisis.
8. Monetary Policy.
9. Financial Regulation: Micro-Prudential and Macro-Prudential.
10. Fiscal Policy.
Lecture 06: September 22, 2015The Great Moderation
SUPPLEMENTARY READING
John B. Taylor, "What Went Right in the Two Decades before the Crisis," Chapter 4 in Getting Off Track, Stanford, Hoover Institution Press, pp. 31-44. Ben Bernanke, "The Taylor Rule: A benchmark for monetary policy?" Ben Bernanke's Blog, April 28, 2015. See: http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/28-taylor-rule-monetary-policy
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
BEN S. BERNANKE BIOGRAPHY
14th Chairman of the Federal Reserve, Sworn In February 1, 2006.
Born Augusta, Georgia, December 13, 1953; Raised in Dillon, South Carolina.
Harvard College, B.A. in Economics, summa cum laude, in 1975. Resided in Winthrop House.
MIT Ph.D. in Economics in 1979.
Taught at Stanford Business School and Princeton University.
Member of the Federal Reserve Board of Governors, 2002-2005. Chairman of the President’s Council of Economic Advisers under George W. Bush, 2005 until appointment as Chairman of the Fed.
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great ModerationJOHN B. TAYLOR BIOGRAPHY
Mary and Robert Raymond Professor of Economics, Stanford University.
Born in Yonkers, New York, December 8, 1946.
Princeton University, B.A. in Economics, summa cum laude, in 1968.
Stanford University, Ph.D. in Economics, in 1973.
Taught at Columbia, Princeton, and Stanford.
Member of the President’s Council of Economic Advisers under George H.W. Bush, 1989-1991. Undersecretary for International Affairs, 2001-2005.
Lecture 06: September 22, 2015The Great Moderation
WHAT WENT RIGHT IN THE TWO DECADESBEFORE THE CRISIS
Mission Impossible I: Reduce Inflation and Output Volatility Around the World.
Result: The Great Moderation.
Mission Impossible II: Reduce the Frequency and Global Spread of Financial Crises.
Result: The End of the Eight-Year Crisis.
Mission Impossible III: Prevent the Forces of Globalization from Reversing the Missions Already Accomplished.
Result: Too Soon to Tell.
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Bernanke’s View of the Great Moderation: Structural Change
“ … improved management of business inventories, made possible
by advances in computation and communication, has reduced the
amplitude of fluctuations in inventory stocks, which in earlier
decades played an important role in cyclical fluctuations.3 The
increased depth and sophistication of financial markets,
deregulation in many industries, the shift away from manufacturing
toward services, and increased openness to trade and international
capital flows are other examples of structural changes that may
have increased macroeconomic flexibility and stability.”
Lecture 06: September 22, 2015The Great Moderation
Bernanke’s View of the Great Moderation: Monetary Policy
Improved Performance of Macroeconomic Policies: Few disagree
that monetary policy has played a large part in stabilizing inflation,
and so the fact that output volatility has declined in parallel with
inflation volatility, both in the United States and abroad, suggests
that monetary policy may have helped moderate the variability of
output as well.
Good Luck! “… the shocks hitting the economy became smaller
and more infrequent.”
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
The Taylor Rule
The Fed or any other central bank should set the short-term interest
rate and one-and-half times the inflation rate plus one-half times the
GDP gap (actual minus potential output) plus one. The Fed should
raise the interest rate when inflation increases and lower it when
GDP declines, as in a recession. Example: In 1989 when the short-
term federal funds rate was about 10 percent in the U.S., the 10
percent was equal to 1.5 times the inflation rate of 5 percent (7.5)
plus one-half times the GDP gap of 3 percent (1.5) plus one. The
rule was not designed for forecasting; it was meant to be normative,
not positive, yet it turned out to be both. (Paraphrased from
“Frequently Asked Questions” in Taylor’s book.)
Lecture 06: September 22, 2015The Great Moderation
EVIDENCE ON THE GREAT MODERATIONStock and Watson attach more significance to the “good luck” hypothesis.
In his speech on the Great Moderation, Bernanke argues that more
weight should be given to improvements in monetary policy: “I have
suggested that some of the effects of improved monetary policies may
have been misidentified as exogenous changes in economic structure or
in the distribution of economic shocks. This conclusion on my part makes
me optimistic for the future, because I am confident that monetary
policymakers will not forget the lessons of the 1970s.”
Taylor largely agrees with Bernanke; but augments the argument by
introducing Mission Impossible II, which reduces international shocks. The
reinforces Bernarke’s arguments by making part of the “good luck”
endogenous.
Lecture 06: September 22, 2015The Great Moderation
TAYLOR’S ARGUMENT ON MISSION IMPOSSIBLE II
IMF policy during the crisis period was unpredictable.
In early 2003 the IMF introduced the exceptional access agreement
(EAF):
The G7 said in April 2002 that “we are prepared to limit official sector
lending to normal access levels except when circumstances justify an
exception.” The EAF spells out the conditions for exceptional
access.
The collective action clauses (CAC) adopted by Mexico in issuing
bonds in February 2003 made it possible for sovereign borrowers to
restructure their debt without borrowing from the IMF.
Mission Impossible III: Getting back on track.
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
Lecture 06: September 22, 2015 The Great Moderation
Lecture 06: September 22, 2015The Great Moderation
THE GREAT MODERATION: SUMMARY
Mission Impossible I: Reduce Inflation and Output Volatility around the World. This Resulted in the Great Moderation.
Mission Impossible II: Reduce the Frequency and Global Spread of Financial Crises. This Worked until 2007.
Mission Impossible III: Prevent the Forces of Globalization from Reversing Reversing the Missions Already Accomplished.
Mission Impossible IV: Get Back on Track. How Do We Do This?
Lecture 06: September 22, 2015The Great Moderation
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