Macroeconomic policy : demystifying monetary and fiscal policy PDF
Preview Macroeconomic policy : demystifying monetary and fiscal policy
Springer Texts in Business and Economics Farrokh K. Langdana Macroeconomic Policy Demystifying Monetary and Fiscal Policy Fourth Edition Springer Texts in Business and Economics Springer Texts in Business and Economics (STBE) delivers high-quality instruc- tionalcontentforundergraduatesandgraduatesinallareasofBusiness/Management Science and Economics. The series is comprised of self-contained books with a broadandcomprehensivecoveragethataresuitableforclassaswellasforindividual self-study. All texts are authored by established experts in their fields and offer a solidmethodologicalbackground,oftenaccompaniedbyproblemsandexercises. Moreinformationaboutthisseriesathttps://link.springer.com/bookseries/10099 Farrokh K. Langdana Macroeconomic Policy Demystifying Monetary and Fiscal Policy Fourth Edition FarrokhK.Langdana RutgersBusinessSchool RutgersUniversity–NewarkandNew Brunswick Newark,NJ,USA ISSN2192-4333 ISSN2192-4341 (electronic) SpringerTextsinBusinessandEconomics ISBN978-3-030-92057-9 ISBN978-3-030-92058-6 (eBook) https://doi.org/10.1007/978-3-030-92058-6 ©TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNatureSwitzerland AG2002,2009,2016,2022 Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether thewholeorpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseof illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similarordissimilarmethodologynowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. The publisher, the authors and the editors are safe to assume that the advice and information in this bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor theeditorsgiveawarranty,expressedorimplied,withrespecttothematerialcontainedhereinorforany errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional claimsinpublishedmapsandinstitutionalaffiliations. ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland To my wife, Mary Macroeconomic Policy is a lively and informative introduction to the diverse doctrines of macroeconomic theory. Prof. Robert E. Lucas, Jr. Recipient of the Nobel Prize in Economics The John Dewey Distinguished Service Professor Emeritus in Economics The University of Chicago, USA This book engineers unique stealth approach to learning macroeconomics. Readers will be drawn in through the interconnected sets of policy analyses, fortified by innumerable relevant and imaginative examples, little realizing that they are absorbing an increasingly sophisticated set of macroeconomic tools along the way. Prof. Richard C. K. Burdekin Jonathan B. Lovelace Professor of Economics Claremont McKenna College and Claremont Graduate School Claremont, California, USA Foreword Macroeconomic policy analysis has been in a state of flux since the early 1970s. Althoughthecasualstudentofmacroeconomicsmightexpectthateconomistswould have come to some agreement in our quest to model the so-called real world, the analysis of macroeconomic policy has perhaps never been so confounding as it is today.Eachmonetaryorfiscalpolicyeventisalmostinevitablyfollowedbyatleast twocompletelydifferentandconflictingsetsofanalyses. Consider, for example, the question of whether government spending affects GDP growth. One can find just about any answer to this question possible—some sayitincreasesGDP,somethatitdecreasesGDP,andsomeclaimnoeffect.Others goontoclaimthattheanswerdependsonwhethertheeconomyisadevelopedone, suchastheUSA,oranemergingone,likeChinaandIndia. Another central source of confusion is the proverbial Phillips Curve, which, as originally conceived, related the unemployment rate to wage inflation. Some researchers have found an inverse relationship between these variables; others have found no link at all. What’s more, the economics profession has introduced newandimprovedvariantsonPhillips’tradeofftheme—inflationversusunemploy- mentrates,inflationversusGDPgrowth,inflationversuscapacityutilization,andso on.Foreachofthesepostulatedrelationships,virtuallyanyconclusioncanbefound. And to confound things further, the conclusions appear to change as the economy changes. The statistical evidence from the much-heralded “New Economy” of the late1990sseemstosuggestthatrapidGDPislinkedmoretolowthanhighinflation. WilltherealPhillipscurverelationshippleasestandup? Conceivably,thereareasmanyinterpretationsofeconomicphenomenonasthere areeconomiststointerpretthem.Allthismaybewellandgoodfromthestandpoint of the passionate researcher, who makes a living in an endless search for the macroeconomic Holy Grail. But for the typical student, less interested in contrast andmoreinterestedinconclusions,theresultcanbeastateofconfusionasheorshe moves from class to class, from book to book, or from publication to publication. Findingthetruthforeconomicsstudentshasbecomeabitofamystery. ix x Foreword Enter Farrokh Langdana’s book, aptly titled Macroeconomic Policy: Demystifying Monetary and Fiscal Policy. Not only does the book shine a bright lightthroughthedensefogsurroundingeconomists’centristpositiononmacroeco- nomic thought, it does so with a set of tools virtually all readers can handle. The cumbersome mathematics that most modern economists love but most students loatheareputasideinfavorofteachingtoolswithwiderappealandsuitability. Eveneconomistshaverecognizedthatasourprofessionhasaged,ourlanguage— both verbal and quantitative—has become more convenient and precise for us, but lessaccessibleandattractivetothegeneralaudience.So,whatshouldtheeconomics professor do? Economist Francis Edgeworth, writing nearly a century ago about AlfredMarshall,oneofeconomics’originalandfirst-classmathematicians,saidthat “Marshall, who desired above all things to be useful, deferred to the prejudices of those that he wished to persuade (emphasis added).” In other words, we should speak in the language of our audience, not our profession. Increasingly, the eco- nomics profession shuns this communication principle in favor of “rigor,” all the while knowing that, as economist Robert Heilbroner said, “Mathematics has given economicsrigor,butalas,alsomortis.” TheBureauofLaborStatisticsestimatesthatthereareroughly19,000economists (includingeconomicsprofessors)intheUSAoutofapopulationofroughly331mil- lion.Thisfiguresouttobeaboutoneeconomistforevery17,500people.Mustnotit beimportanttospeaktotheother17,499,notjusttotheone?Ofcourse,andthusthis bookiswrittenforyou,notforeconomists. WhenRichardAlmandIwroteMythsofRichandPoor,wesetouttodebunka seriesofwidelyacceptedmythsthattheUSAwaslaggingbehindeconomically,and thatitscitizensweregettingprogressivelyworseoff.Weaccomplishedthecomplete dismantlingofsuchmythsbypresentingsystematicoverwhelmingevidencethatthe USAhasbeenprosperingsplendidlyinrecentdecades,andwedidsousingtheonly tool possible for such a large audience—common sense. The reaction to our book hasbeentremendousbecausewespokeeyetoeyewithfolks,notabovetheirheads. Macroeconomic Policy: Demystifying Monetary and Fiscal Policy takes on an equallyimportanttask—toshowthereaderthatmodernmacroeconomicanalysisis systematic, with logical frameworks within which economies can be successfully analyzed,andtodothiswithouttheuseofoverlyfancytechniques.Theappliedand intuitiveapproachtothetheorycentersondiagrammaticderivations,usingonlythe minimal techniques necessary to prove its points. While the book approaches analysisprimarily viaapplications and analysis, the vital theoretical underpinnings havenotbeensacrificed. Asalong-timeprofessorofeconomics,apracticingeconomist,andanauthor,the teaching approach that I find most compelling is the “applications method.” Begin withanimportantissue(suchassupply-sideeconomics)atleastvaguelyfamiliarto justaboutanybody,setoutthecentralopposingviewswiththeintuitionbehindeach side, then examine the evidence and thrash out the conclusion. That’s the best teachingapproachbecausethat’sthewaypeoplethinkandwork. And thus it is with Professor Langdana’s book, we have a text that is first and foremostapplicationsoriented.That’swhyMBAandExecutiveMBAstudentswill Foreword xi find this book indispensable, financial analysts may like to have it on hand as an essentialreference,andevenageneralaudiencecanfindituseful. Theoverviewchapterclearly andconciselystatesthebook’spositionregarding itsfocusonintuitionandapplicability.Thenotionofallowingthereaderthefreedom of choice between the Keynesian or the Supply-Side paradigm for developed economiesisfreshandradicallydifferentfrommostconventionalmacroeconomics texts. In addition, it is an honest approach, given that both monetary and fiscal policymakers in Washington D.C. still make policy based on assumptions behind eachparadigm. Theauthorstatesthathehastakencarenottoinfluencethereadertowardseither paradigmandhehasfaithfullymanagedtokeepthepromisethroughoutthetext.The coverage is carefully balanced, with the excellent chapter on the New Economy (Chap.10)beingespeciallypertinenttothetwo-modelapproach.Inthechapteron monetary policy (Chap. 11), Farrokh Langdana and Giles Mellon actually discuss thefactthatreserverequirementsarenotbindinganymoreintheUSA.Thisisoneof veryfewtextsthathasmanagedtocogentlyexplainhowtheconventionaltextbook explanationofopenmarketoperationsandthe“moneymultiplier”hassubstantially changedinseveralmajoreconomies. Thesimulated“mediaarticles”followingeachchapterarevitaltothistextandto truly analyzing macroeconomic policy in general. It rapidly becomes evident through the clarity of exposition why the author has been consistently rated so highlyasateacher. W.MichaelCoxistheformerDirectoroftheO'NeilCenterforGlobalMarketsand Freedom in the Cox School of Business at Southern Methodist University and co-author (with Richard Alm) of the highly acclaimed Myths of Rich and Poor: WhyWe’reBetterOffThanWeThink(nominatedforaPulitzerPrize).Heisformerly SeniorVicePresidentandChiefEconomistattheFederalReserveBankofDallas, where he served for 25 years. In fact, Dr. Cox is the only Chief Economist in the historyoftheFederalReserve.HeisaregularcontributingcolumnistforInvestor’s BusinessDaily,inadditiontobeingafrequentguestonCNN,FoxNews,Voiceof America, and National Public Radio. He is past President of the Association of PrivateEnterpriseEducation,aCATOInstituteAdjunctScholar,seniorfellowatthe National Center for Policy Analysis, and senior fellow at the Dallas Fed’s Global- izationandMonetaryPolicyInstitute.
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