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What Ends Recessions?

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  • Christina D. Romer
  • David H. Romer

Abstract

This paper analyzes the contributions of monetary and fiscal policy to postwar economic recoveries. We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries. Our estimates also indicate that on several occasions expansionary policies have contributed substantially to above-normal growth outside of recoveries. Finally, the results suggest that the persistence of aggregate output movements is largely the result of the extreme persistence of the contribution of policy changes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4765.

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Date of creation: Jun 1994
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Publication status: published as Fischer, S. and J. Rotemberg (eds.) NBER Macroeconomics Annual 1994. Cambridge: MIT Press, 1994.
Handle: RePEc:nbr:nberwo:4765

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  1. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 241-65, February.
  2. Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles, Harvard University Department of Economics 3122545, Harvard University Department of Economics.
  3. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1031-44, December.
  4. Sichel, Daniel E, 1994. "Inventories and the Three Phases of the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 269-77, July.
  5. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers, University of California at Berkeley 89-107, University of California at Berkeley.
  6. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
  7. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers, National Bureau of Economic Research, Inc 2737, National Bureau of Economic Research, Inc.
  8. Lawrence J. Christiano & Martin Eichenbaum, 1989. "Unit Roots in Real GNP: Do We Know, and Do We Care?," NBER Working Papers, National Bureau of Economic Research, Inc 3130, National Bureau of Economic Research, Inc.
  9. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers, National Bureau of Economic Research, Inc 3487, National Bureau of Economic Research, Inc.
  10. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper, Federal Reserve Bank of Atlanta 92-13, Federal Reserve Bank of Atlanta.
  11. Thomas J. Sargent, 1975. "The observational equivalence of natural and unnatural rate theories of macroeconomics," Working Papers, Federal Reserve Bank of Minneapolis 48, Federal Reserve Bank of Minneapolis.
  12. Christina D. Romer & David H. Romer, 1993. "Credit channel or credit actions? an interpretation of the postwar transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 71-149.
  13. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  14. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers, National Bureau of Economic Research, Inc 3920, National Bureau of Economic Research, Inc.
  15. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 28(3), pages 1115-71, September.
  16. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, American Economic Association, vol. 62(4), pages 540-52, September.
  17. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(1), pages 75-88, August.
  18. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  19. George L. Perry & Charles L. Schultze, 1993. "Was This Recession Different? Are They All Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 145-212.
  20. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 149-163, April.
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  1. What ends recessions? Monetary or fiscal policy?
    by Amol Agrawal in Mostly Economics on 2009-01-30 08:43:23
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