How do Macroedconomists Measure the Effect of Monetary and Fiscal Policy?
Monetary policy influences the economy through its effect on interest rates. Traditionally, lower interest rates make it less expensive for the public sector and consumers to borrow, which stimulates spending. However, a cut in interest rates may also signal instability, spurring less spending and dampening economic growth. Emi Nakamura with the Columbia Business School calls this the "information effect" - and it was the subject of her lecture for the Institute for Public Economics and the Department of Economics' annual Eric J. Hanson Lecture Series on Thursday, March 9, 2017.
Nakamura's field of research includes monetary and fiscal policy, business cycles, finance, exchange rates and macroeconomic measurement. In 2014, the associate professor at Columbia Business School and Research Associate of the National Bureau of Economic Research was listed as one of the 25 most influential young economists by the International Monetary Fund.
Her 2017 lecture, "How do Macroeconomists Measure the Effects of Monetary and Fiscal Policy?" was of interest to economists, but also to those who have their eye on the vagaries of the marketplace here in Canada and in the US.
"The big challenge in macroeconomics is that we don't have real 'experiments' with which to measure these effects," says Nakamura. "Governments tend to cut interest rates and do fiscal stimulus during recessions - [but] we have only limited scientific evidence on the effects of these policies. Which means that there is much more room for ideology - as opposed to science - in determining people's opinions on the right amount of government spending in a recession. I will discuss some ways macroeconomists try to get around these issues - and what we have learned from this research."
Nakamura says that the information effect - whereby expansionary monetary policy can actually signal pessimism - is potentially more important in an era in which the determinants of monetary policy are uncertain. "Monetary policy has gone to new frontiers since the Great Recession," she says. "Yet, measuring the effects of monetary policy remains extremely challenging. Much of monetary policy is about how the central bank responds systematically to variables like output and employment, but it is exactly when the central bank must deviate from this systematic behavior that the information effect has the potential to be strongest."