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Macroeconomic Policy Questions and Methods Chapter 2. Building a Multicountry Empirical Structure Appendix 3a. Transitions to New Policy Systems Chapter 8. Program to simulate the multicountry model using the extended path algorithm, and data used to estimate original equations Rational Expectations Model Simulation Program Program Manual by John Williams Raw or converted data Pkunzip.

This paper simulates the multicountry model stochastically to see whether inflation forecast targeting rules or exchange rate oriented policy rules work better than my simple rule as a guideline for the European Central Bank.

Macroeconomic Objectives

The model emulates the European Monetary Union by permanently placing Germany, France, and Italy in a single currency area and letting the pound float against with Euro along with the U. By simulating the multicountry model stochastically, it examines how much fiscal policy would have to react if monetary policy makers could not react to output--perhaps because of a law or custom that lead them to react only to inflation.

Because monetary policy reacts only to inflation and fiscal policy reacts only to real output, the situations is similar to Robert Mundell's famous policy mix proposal, except that it refers to policy rules and the reaction variable rather than the target variable. This paper is the mirror image of the previous paper. It examines how much more monetary policy should react to real output if fiscal policy through the automatic stabilizers could not react to real output, perhaps because of a balanced budget amendment that did not permit deficits.

Simulating the multicountry model stochastically, I find that the coefficient on output in the monetary policy rule is higher than without the constraint on fiscal policy. Where do we go from here? In terms of research, the future is exciting.

There are many topics on which we should work—namely macro issues with, as Joe Stiglitz said, the right micro foundations. Things are harder on the policy front. While we have a good sense of where we want to get to, a step-by-step approach is the way to do it.

Pragmatism is of the essence.


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We have to try things carefully and see how they work. We have to keep our hopes in check. There are going to be new crises that we have not anticipated. And, despite our best efforts, we could have old-type crises again.

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Director of Macroeconomic Policy - Equitable Growth

Can we, using agency theory and the right regulations, get rid of credit cycles? Or is it basic human nature that, no matter what we do, they will come back in some form? I was asked whether the conference was " Washington Consensus 2 ". It was not intended to be and it was not. The conference was the beginning of a conversation, the beginning of an exploration, and we look forward to your contributions. I will make extended comments below the fold. Here is a crucial sentence: […].

As I have commented previously here when regulators got involved in risk management and decided they would favor immensely what was perceived as having a low risk of default, even though those perceived as having a low risk of default already were much favored by the market, they shook ground zero, and got the markets moving towards the crisis. In this respect, one of the most important issues to understand is how come such regulatory mistakes were made… and the answer is… because a very small group of persons managed to kidnap the debate and the regulatory process. A mutual admiration club arrangement is one of the most dangerous set ups as it can so easily degenerate into outright stupidity, and when this becomes leveraged on a global scale then there is no limit to what harm could be done.

For instance, I ask what extra-natural forces allow a Basel Committee to apply basically the same regulatory paradigm that got the financial system into the crisis, and to still be able to regulate without defining a purpose for the banks it regulates. Accountability that requires the change of failed regulators and experts, is of key importance if we are going to stand a chance of a functioning global regulatory system… otherwise we are clearly better off letting a thousand regulatory systems bloom… or having none at all. If regulators are currently so successful in hiding their responsibility… can you imagine how much easier it will be for them to hide when they introduce the new reform complications, and which will guaranteed be even harder to gauge and understand?

At the end of the conference, I organized my concluding thoughts around nine points. Years ago while a professor at the Claremont Graduate School I filled in for a very famous macroeconomist and taught a graduate course in macroeconomics at a great American university.

Undergraduate - Unit

This was the final course for PhD students. They took their PhD exams immediately after the course.

Further information

Most of them went on to become university faculty and Federal Reserve employees. I found their knowledge of macroeconomics to be minimal. Indeed at the end of the class I commented to the department chairman that most of his PhD students in economics could not pass an undergraduate macro course at Claremont, let alone teach it.

Each and every one of them was highly trained in statistics and mathematics. But they had not a clue as to how economic institutions and policies and the decisions of individuals affect the real world of prices, employment, and production. It was a time of high interest rates and inflation so most of them were planning dissertations relating interest rates and the quantity of money to inflation.

Macroeconomic Policy: Objectives and Instruments

The very real condition that the money supply might be increased to accomodate transactions at higher prices instead of causing the higher price levels distressed them and subsequently several PhD committees. I recall one young gentleman proving conclusively and scientifically that inflation was caused by increasing the money supply. He put up a marvelous equation to model the economy, plugged in an increase in the money supply, and voila a policy presented itself — reduce the monetary expanison to raise interest rates and the inflation would end!

He and the class were appalled when I pointed out that the increases in the money supply and CPI over the years he presented tracked even better when the increases in price levels were associated with the ever increasing speed of airplanes over that period of time such that a better way to fight inflation appeared to simply require the Federal Reserve to order planes to fly slower.

The world is complex and filled with black swans. What counts when advocating a policy is an understanding of both the basic relationships between spending and production AND the complexities and institutional responses of the real world. It is my observation that most so-call macroeconomists emphasize the former and all but ignore the latter.

I found this […]. What killed it? A series of empirical and conceptual anomalies […]. Mr Blanchard: One fact which is clear to me is that when the people that manage financial institutions are personally at risk from the failure of their institutions banks, insurance companies, etc.

The separation of economic rents from the carrying of risks is at the heart of our problems.