The effectiveness of tax rebates as countercyclical fiscal policy
Jonathan A. Parker 17 June 2014
Governments around the world are searching for macro-stimulation instruments. This column discusses evidence showing that rebate-type payments policies generate substantial increases in demand for goods and services. In particular, a large portion of tax rebates are spent rapidly on arrival.
A decade ago, there was general agreement among practitioners and academics about the conduct of policy to stabilise developed economies. Governments limited anti-recessionary policy to responses by central banks, which in turn limited their policies to adjustments in short-term interest rates through open market operations. Policymakers and researchers disagreed mostly about the scale and timing of interest rate policy within the context of the New Keynesian model of how stabilisation policy worked in principle (as in Woodford 2003).
recessions, fiscal stimulus, tax rebates
“There will be growth in the spring”: How well do economists predict turning points?
Hites Ahir, Prakash Loungani 14 April 2014
Forecasters have a poor reputation for predicting recessions. This column quantifies their ability to do so, and explores several reasons why both official and private forecasters may fail to call a recession before it happens.
Since the onset of the Great Recession, much of the world has been in a state of economic winter: nearly 50 countries were in recession in 2009 and 15 countries slipped into recession in 2012. After weak global growth in 2013, economic forecasters are predicting a rosier outlook this year and next. Can these forecasts be trusted? Or are forecasters simply intoning – like Chauncey Gardner, the character played by Peter Sellers in the movie Being There – that “there will be growth in the spring”?
Fact-checking financial recessions: US-UK update
Moritz Schularick, Alan Taylor 24 October 2012
Is the sluggish growth we see in the North Atlantic economies normal? This column updates the authors’ 5 October 2012 column to include an analysis of the UK. The original column looks at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected. The same cannot be said of the UK’s growth performance.
Debate on the “What should we have expected in terms of economic recovery?” question is raging on the internet (Reinhart and Rogoff 2012, Taylor 2012). Since publishing our widely-read column a few weeks ago, we have received several enquiries asking if we can apply the same benchmarks to evaluate the current performance of the UK economy. We now can.
Economic history Global crisis Macroeconomic policy
financial crises, recessions, credit
Recessions and small business access to credit: Lessons for Europe from interstate banking deregulation in the US
Mathias Hoffmann, Iryna Stewen 19 February 2012
Few would deny that there is a strong link between the health of a country’s banks and its public finances. With that in mind, this column argues that the banking system can learn from banking deregulation in the US, with knock on effects for Europe’s sovereign debt crisis.
The European sovereign debt crisis is often viewed as a banking crisis in disguise (see, for instance, Mody and Sandri 2011 on this site). Policymakers are rightly concerned about the prospect that ever more cautious banks may eventually stop lending to small and medium-sized businesses (or enterprises, known as SMEs). While large firms can tap capital markets directly, SMEs are particularly bank dependent.
recessions, credit, SMEs, banking deregulation
Calling recessions in real time
James D. Hamilton 18 July 2010
Is the world economy about to experience a "double-dip" recession? This column argues that, while there may be a recession on the way, the current recession ended in the summer of 2009. Any subsequent downturn should thus be labelled a new recession.
Is the world economy about to experience a "double-dip" recession, going back into a new downturn before the recovery from the previous recession is even complete? Or, if there is a subsequent downturn, should it be described as a new, separate recession? The answer requires an objective characterisation of what we mean when we say the economy is in a recession.
Global crisis Global economy
recessions, economic forecasting, business cycle
Oil prices and the economic recession of 2007-08
James D. Hamilton 16 June 2009
Past oil price spikes associated with Middle East conflicts and OPEC embargos were each followed by a global economic recession. This column argues that the onset of the current economic downturn of is also partly attributable to a sharp increase in the price of oil. Moreover, the interaction of high oil prices and housing problems contributed to the severity of the downturn.
Big oil price increases that were associated with events such as the 1973-74 embargo by the Organisation of Arab Petroleum Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990 were each followed by a global economic recession. The price of oil doubled between June 2007 and June 2008, a bigger price increase than in any of those four earlier episodes.
Energy Global economy
oil shocks, recessions
From recession to recovery: A long and hard road
Prakash Kannan, Marco E Terrones, Alasdair Scott 06 May 2009
Two features of the current recession – its association with a deep financial crisis and its highly synchronised nature – suggest that it is likely to be unusually severe and followed by a weaker-than-average recovery. Current and near- term policy responses are the key to understand how the recession will evolve this time.
The advanced economies are experiencing a financial crisis and a highly synchronised recession, which is a very rare combination of events. This raises three questions; Are recessions and recoveries associated with financial crises different from others? What are the main features of globally synchronised recessions? Can countercyclical policies help to shorten recessions and strengthen recoveries?
Global crisis Global economy
economic recovery, financial crises, recessions
What Keynes should have said
Roger E. A. Farmer 04 February 2009
This column proposes a new paradigm to reconcile Keynesian economics with general equilibrium theory. It suggests that, just as it sets the fed funds rate to control inflation, the Fed should set a stock market index to control unemployment. This would not let every manufacturing firm and every bank fail at the same time “as a result of speculative movements in markets that serve no social purpose.”
For more than seventy years, policy makers have used Keynesian monetary and fiscal policies to control recessions (Keynes 1936). Although these policies are widely perceived to have been successful in stabilising the business cycle, academics gave up on Keynesian theory in the 1970s. The appearance of stagflation led to the adoption of the Phelps-Friedman hypothesis of a natural rate of unemployment, and it caused academics to abandon the Keynesian idea of many steady-state unemployment equilibria (Cross 1995).
unemployment, recessions, Keynesian economics
Are there cleansing effects of recessions? Entry and exit of manufacturing plants over the business cycle
Yoonsoo Lee, Toshihiko Mukoyama 07 January 2008
It is commonly believed that business cycles ‘cleanse’ industry with waves of creative destruction. New research shows that entry is higher in booms than busts, but exit rates and the type of exiting firms, are steady over the cycle. Plants entering during recessions, however, are larger and more productive –‘creative entry’ rather than ‘creative destruction’.
Creative destruction is a major driving force of modern market economies.1 Firms enter and exit the marketplace, plants are built and destroyed, and workers change jobs and occupations. In recent decades, economists have started to learn that the amount of reallocation that occurs in market economies is massive.2 It is the rule rather than the exception, and it is essential in a well-functioning market economy.
business cycles, recessions, creative destruction, US manufacturing