Tuesday, July 9, 2013

Bernanke on fiscal policy: Keynesian ma non troppo

I noted before that Christina Romer, who was the chairwoman of the CEA and responsible for the fiscal package in 2009, held views on the recovery from the Great Depression that were ironical given her position. She argued in her classic paper that fiscal policy was irrelevant. Another New Keynesian that held similar views was Ben Bernanke. He says, in a famous paper published in his Essays on the Great Depression trying to explain industrial output, that:
"In an attempt to control for fiscal policy, we also included measures of central government expenditure in our first estimated equations. Since the estimated coefficients were always negative (the wrong sign), small, and statistically insignificant, the government expenditure variable is excluded from the results reported here."
So in his view (and his co-author, Harold James) fiscal policy was not relevant for industrial recovery. This view was challenged here (a significantly modified paper was accepted for publication). It is worth remembering that the current state of the profession, in which Keynesian ideas are in the defensive and austerity is king, is at least in part the fault of New Keynesians.

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