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W08 Macro Policy in Practice (Policy lag (Inside lags (Action lag (lag…
W08
Macro Policy in Practice
Policy
Target
identified goals of policy
Ultimate targets
: improve welfare of society, etc.
Intermediate target:
output, prices, unemployment
Instruments
tools policy makers manipulate directly
Indicators
economic variables indicate closeness to desired targets
Interest rate & AD
High IR
=> Reduce purchases of durable goods
=> Reduce AD
=> Leftward shift of AD
=> Lower prices and output
=> Output level are negatively related to IR
Policy lag
Cause overshooting in correction process of the disturbance
Inside lags
Time period it takes to undertake policy action
Recognition lag
Period elapses b/w the time a disturbance occurs & the time policy makers recognise action is required
Cause: macro statistics only available at a monthly, quarterly or annual frequency with a delay
Decision lag
delay b/w the recognition of the need for action & the policy decision
Involves time in formulating an appropriate policy response
Action lag
lag b/w policy decision & implementation
Usually short for monetary policy
Slower for fiscal policy
= discrete lag: there's a period of time b/w each lag from recognition to action
Outside lags
associated with the impact of policy on the economy
= distributed lags: policy effects spread over time, gradually accumulate
Fiscal policy lags vs Monetary
Fiscal Policy lags have Shorter outside lags
Longer inside lags
=> less useful for stabilisation
Automatic stabilisers
Automatic mechanism to reduce impacts of an economic shock
Income tax
LImits AD by ensuring disposable income rise by less than income in a boom
Unemployment benefit
boosts AD by ensuring disposable income falls by less than income in a recession