Economic Policy: Theory and Practice

724 Pages·2010·2.74 MB·English

by  Agnès Bénassy-Quéré

Economic Policy
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Economic Policy
Theory and Practice
AgnèsBénassy-Quéré,BenoîtCœuré,
PierreJacquet,andJeanPisani-Ferry
3
2010
3
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Copyright©2010byDeBoeck&Larciers.a.,2004,1eédition
EditionsDeBoeckUniversité
RuedesMinimes39,B-1000Bruxelles,Belgium
AgnèsBénassy-Quéré,BenoîtCoeuré,PierreJacquet,JeanPisani-Ferry
Politiqueéconomique
PublishedbyOxfordUniversityPress,Inc.
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[Politiqueeconomique.English]
Economicpolicy:theoryandpractice/AgnèsBénassy-Quéré... [etal.].
p.cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-19-532273-6
1. Economicpolicy. I. Bénassy-Quéré,Agnès.
HD87.P655132010
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Foreword
ThisbookisabookIwouldhavelovedtowrite.IndeedthisisabookIlong
wanted to write. I wanted to do so out of guilt. For a long time, I have felt
thatmygraduatetextbookwrittenwithStanFischersentthewrongmessage.
Wehadmadethechoicetopresentmodelsandtheirlogic,ratherthantheir
applications.Thejustificationwasaperfectlygoodone,namelythatwewanted
toshowtheintellectualstructureofmacroeconomictheoryfirst.But,defacto,
the lack of serious empirics sent another message: That theory was largely
divorcedfrompractice,andfromfacts.Thatmessageiswrong:Theorywithout
factsismuchtooeasy,andofverylittleuse.Ialsowantedtowritesuchabook
outofadesiretosharewithstudentsmyexcitementaboutmovingbetween
theory,facts,andpolicy.Itistraditionaltodosoinundergraduatetextbooks,
at least in the United States. Those textbooks are full of discussions about
policydebates—abouttheeffectsofpolicychoicesontheeconomy.Ithought
itwouldbeevenmorefuntodosowithgraduatestudents,whohavemore
tools,boththeoreticalandeconometric,attheirdisposal.
AgnèsBénassy-Quéré,BenoîtCœuré,PierreJacquet,andJeanPisani-Ferry
havebeatenmetoit.Iamhappytheydidso,becausetheyhavedoneabetter
jobthanIcouldhavehopedto.
Togiveasenseofwhattheyhaveachieved,Ishalltakeoneexample,the
creationorreformoffiscalframeworksliketheEuropeanStabilityandGrowth
Pact(SGP).Tocometoanintelligentsetofrecommendations,thinkofallthe
elementsyouneedtoputtogether:
• Youneedtounderstandwhatsustainabilitymeansintheoryandin
practice,whatthecostsofnotabidingbysustainabilityare,andhowto
vi Foreword
assesssustainability.Whendoesadebt-to-GDPratiobecometruly
excessive?Whathappensthen?Howfastcanyoureachthatthreshold?
Howfastcanyoumoveawayfromit?
• Youneedtounderstandthelong-termeffectsofdeficitsanddebton
outputanditscomposition.Howdodeficitsanddebtaffectoutputin
themediumandthelongrun?Howdotheyaffecttheinterestrate,the
netforeigndebtposition,thecapitalstock?Whatisthecostinterms
oflostconsumptioninthefuture?Whichgenerationsgain,which
generationslose?
• Youneedtounderstandtheshort-termeffectsofdeficits,andhow
counter-cyclicalfiscalpolicycanhelpintheshortrun.Dodeficitsaffect
activityinthesameway,whethertheycomefromtaxcutsorspending
increases?Howimportantareexpectationeffects?Cantheanticipation
oflargedeficitsinthefutureleadtoadecreaseinconsumptionand
investment,andadecreaseinoutputtoday?Whenisthismorelikely
tohappen?
• Youneedtounderstandthemacroeconomiccostsofdecreasedpolicy
flexibility.Areconstraintsondeficitsanddebtconsistentwithan
appropriateresponseoffiscalpolicytoshocks?Whatexplainssustained
divergenceswithintheeuroareaduringthefirst10years?Weresuch
divergencesavoidable?Thenyouneedtodeterminewhetherandto
whatextentfiscalpolicyistherighttooltodealwithcountry-specific
shocks,andtowhatextentitcan(should)substituteforthelackofan
independentmonetarypolicy.Finally,youneedtofigureouthowmuch
policyspaceislefttogovernmentsaftertheyhavefoughtthenewgreat
recessionandrescuedtheirbanks.
• Youneedtothinkabouthowtodefinetherulesinpractice.How
shoulddebtbedefined?Howshouldimplicitliabilities,comingfrom
socialsecurityandotherpromisestofuturegenerations,betreated?
Ifrulesaredefinedintermsofdeficitsanddebt,whatarethemost
appropriatedefinitionsofthetwoconceptsforthequestionathand?
Howshouldrulesdealwithprivatizationrevenues?Shouldrules
applytogrossdebtortonetdebt?Shouldthebudgetbeseparated
betweenacurrentaccountandacapitalaccount?Shouldthedeficit
rulesapplyonlytothegovernmentcurrentaccount?Shouldrulesbe
enforcedbypoliticiansorbyindependentcommittees?
• Youneedtothinkaboutpolitical-economyissues.Whyarerules
neededinthefirstplace—toprotectpeoplefromtheirgovernments,or
toprotectthegovernmentsfromthemselves?Howcanaparticularsetof
rulesbemanipulatedordistortedbyanationalgovernment?Howwill
sanctionsagainstamisbehavinggovernmentbeimposed?Willthese
sanctionsbecredibleexante?Isinternationalcoordination,suchas
intheG20framework,anadvantageoradiversionfromevery
government’sduties?
Foreword vii
Toanswerthesequestions,youneedmanyconceptualtools.Amongthem
are: A dynamic general equilibrium model with overlapping generations;
a model of short-run fluctuations with careful treatment of expectations;
political-economymodelstothinkaboutthecaseforrules;agencymodelsto
helpyouthinkaboutthedesignofspecificrules.Ineachcase,withguidance
fromtheory,youneedtolookattheevidence,soastogetasenseofwhich
theoreticalargumentsaremorerelevant.Thisisnoteasytodo.Courseswill
typicallygiveyouthetheoreticaltools,withoutmuchincentivetoapplythem,
andleaveyoutousethemonyourown,withoutmuchpracticaltraining.This
isnotwhatthisbookdoes.Itmotivatesyoutousetools,givesyouthetools,
andshowsyouhowtheycanbeemployed.
Last but not least, this book is among the very first that offer students
arigorousandcomprehensivetreatmentofthefinancialcrisisandthegreat
recessionthatfollowed.Theauthorsdonottrytocastaveilovertheconceptual
difficultieseconomistsfacewhentheyreflectonthecausesofthecrisis,onthe
limitationsoftraditionalapproachesthatthecrisishasuncovered,andmaybe
the excessive faith in theory, and on the need for more theoretical work to
understandbetterthecrisisandmakesureitdoesnothappenagain.Butthey
do not throw the baby out with the bath water and claim that economists
have“mistakenbeautyfortruth,”aswassuggestedbyPaulKrugman.Onthe
contrary, they show how existing theories can be used, cross-fertilized, and
placedinahistoricalcontexttounderstandthecrisisbetter.Thisistheway
forward.
In short, this book trains you to be a good macroeconomist—a good
economist.Itinstillstherightattitude,andgivesyoutherightmethodology:
Tobuildsolidlyontheory,tousethetheorytolookatthedata,andthento
go back and forth between the two until a coherent picture forms. As I was
readingthebook,Ifeltagaintheexcitementthatcomeswithdoingresearch
onmacroeconomics.Ihopethisexcitementiscontagious,andIwishyoua
verygoodread.
OlivierBlanchard
MassachussettsInstituteofTechnologyand
InternationalMonetaryFund
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Preface
This is a book for all those interested in what shapes, or should shape,
economic policy: The major stylized facts that capture the messages from
history; the theories that help us understand these facts and represent the
impactofpolicydecisions;thecontroversiessurroundingpolicychoices;the
institutionsthatcontributetodeterminingthem;and,lastbutnotleast,how
experience,theories,andinstitutionsinteract.
We have been teaching the material that forms the basis of this book in
a graduate seminar at the École Polytechnique in Paris since 1998, and also
at Sciences Po, École Normale Supérieure, École des Ponts–ParisTech, and
Université Paris-Dauphine. In 2004 a first book in French arose from this
experience,followedbyasecondeditionin2009.ThisEnglisheditionpresents
completelyrevisedmaterial,drawingonourexperiencewithpreviouseditions
andonthepolicylessonslearntintherecentglobalcrisis.
Preconditionsforusingthisbookarelimited,becausewestartfromfacts,
introducetheoriesasneeded,andkeepformulasinboxes.Practitionersand
observers will find what they need to understand actual policy issues and
discussions.However,graduatestudentsmorefamiliarwithmodelswillalso
learnhowtolinkleading-edgeresearchtoconcretepolicydevelopments.
Thisbookalsoaimstoeschewculturalbias.Ouranalysisstartsfrompolicy
questionsinEurope,theUS,andtheemergingworld,andourexamplesare
takenfromaroundtheworld.