Friday, October 21, 2016

Has Macroeconomic Policy Been Different Since the Crisis?

Brad DeLong wonders whether macroeconomic policy has been different in the post-2009 recovery. If we assume the role of macroeconomic policy is to stabilize aggregate demand growth, then my answer is an unequivocal yes. Macroeconomic policy was very different during the recovery than in previous periods. 

It was different in two key ways. First, aggregate demand growth was kept below its pre-crisis trend growth rate. Since the recovery started in 2009Q3, NGDP growth has averaged 3.3 percent. This is well below the 5.4 percent of 1990-2007 period (blue line in the figure below) or a 5.7 percent for the entire Great Moderation period of 1985-2007. Any way you slice it, macroeconomic policy has dialed back the trend growth of nominal spending. This can be seen in the figure below.

Second, aggregate demand growth was not allowed to bounce back at a higher growth rate during the recovery like it has in past recessions. Put differently, macroeconomic policy in the past allowed aggregate demand to run a bit hot after a recession before settling it back down to its trend growth rate.  This kept the growth path or level of NGDP stable. You can see this if the figure above by noting how the growth rate (black line) would typically go above the trend (blue line) temporarily after a recession. 

Had macroeconomic policy allowed this NGDP growth to follow its typical bounce-back pattern after a recession, we would have seen something like the red line in the figure. This line is the dynamic forecast from a simple AR model based on the Great Moderation period. This naive forecast shows one would have expected NGDP growth to have reached as much as 8 percent during the recovery before settling back down. Instead we barely got over 3 percent growth.  

So yes, macroeconomic policy has been different since the crisis. This policy choice, in my view, is a key reason whey the recovery was so anemic. 

P.S. Speaking of NGDP growth, Ambrose Evans-Pritchard NGDP has a sobering piece in the Telegraph noting that nominal demand has been persistently falling since late 2014. This decline in nominal economic activity, in my view, is tied to the Fed's implicit tightening of monetary policy via the talking up of rate hikes since mid-2014. 


  1. An extended version of the movie:

  2. The Fed has been incomprehensibly obtuse in dealing with the very elementary question of asymmetric risk - which becomes lethally convex at the zero bound.

  3. It could be that traditional economic theory is dead. I am not an economist, but apparently Keynes' law of monetary theory and interest rates is not working now: