Temporal Inconsistency and the Credibility of Eco Policies

‭Temporal inconsistency and the credibility of eco policies‬ ‭ )‬ a ‭Temporal inconsistency and the political-economic cycle:‬ ‭-Temporal inconsistency and the political-economic cycle: Nordhaus: To be re-elected, the‬ ‭government risks increasing the G to revive economic activity and reduce unemployment, but in‬ ‭defiance of macro imbalance (infla, deficit). This gives rise to a political-economic cycle which‬ ‭increases the instability of activity‬ ‭INSEE has identified an electoral cycle in France between 1965 and 2000‬‭:I municipality‬ ‭increases on average by 6% over the last two years preceding a municipal election and falls by‬ ‭almost 5% over the two years following them.‬ ‭ )‬‭Time inconsistency disqualifies discretionary policies:‬ b ‭Discretionary policies ineffective because they are not credible. It is necessary to rule‬‭policies to‬ ‭prevent political decision-makers from calling into question their commitments (see Europe and‬ ‭ M).‬ P ‭Kydland‬‭And‬‭Prescott,‬‭Rules rather than Discretion,‬‭1977‬‭:‭m ‬ ust‬‭rule policy and ban discretionary,‬ ‭because private‬ ‭agents (AR) do not give any credence to announced policies if they know that they can be called‬ ‭into question at any time - cancels the expected effects of these policies.‬ ‭To establish their credibility, public authorities must therefore tie‬‭hands‬‭ie strive to follow fixed‬ ‭rules which will prevent them from violating their commitments in the future -‬‭credibility.‬ ‭ -‬ 2 ‭Other cases:‬ ‭-We have seen the limits of natural monopolies held 100% by States (ineffective)‬ ‭-We have seen the risk of industrial policy (State aid may not be good). Etc.‬ ‭ hapter 2: The State and economic cycle regulation policies:‬ C ‭1)‬‭Budgetary policy and its constraints:‬ ‭1-‬ ‭Principles and effectiveness of budgetary policy:‬ ‭BP is at the heart of Keynesian analysis. Long considered the instrument of choice, its‬ ‭effectiveness has been called into question.‬ ‭ )‬ a ‭Budgetary policy is mainly based on the multiplier‬ ‭effect:‬‭The different types of multipliers:‬ ‭PB's function is to regulate economic activity to stimulate it (relaunch) or slow it down (austerity).‬ ‭Keynes‬‭,‭G ‬ eneral theory of employment, interest and‬‭money‬‭,‬‭1936‬‭:I expenditure is a component of‬ ‭DG, which drives the economy. Effectiveness of fiscal policy is mainly based on the‬‭multiplier‬ ‭effect:‬‭An increase in public I generates an increase‬‭in D in successive waves, the final increase of‬ ‭which is an increase in global Y (income), a multiple of the initial I‬‭.‬ ‭The multiplier coefficient k‬‭= 1/(1-c)‬‭ie 1/s in closed‬‭eco and at‬‭k=1/s+m‬‭in open eco where m is the‬ ‭marginal propensity to M (therefore weaker effect in open eco). - k is therefore higher as the pmc is‬ ‭high and the pmm is low.‬ -‭ The State can also revive activity by lowering taxes.‬‭Tax‬‭multiplier‬‭measure impact of -‬ ‭taxes on Y. The latter is weaker than the multiplier of I which is therefore more effective for‬ ‭relaunching.‬ I‭n an EMU with mobile K - PB even more effective because the eviction effect by Ti is diluted‬ ‭Structure Of‬‭the PB impacts the -pot (educ, R&D etc.)‬ ‭ he value of the multiplier depends on:‬‭the level‬‭of debt and dvlp (Ricardian effects if debt too‬ T ‭high) / position in the‬ ‭cycle / the type of tax and expenditure / the choice of partners' PB and the openness of the country /‬ ‭size of the country. In a small country, fiscal stimulus is unnecessary because the margin to import‬ ‭is enormous.‬ ‭ balanced budget can stimulate economic activity:‬ A ‭Theorem‬‭of Haavelmo‬‭,‭1 ‬ 945‬‭:an increase in G financed‬‭by an increase in taxes of the same value‬ ‭(budget balance) had a positive impact on growth. Because the multiplier effect >0 of G is greater‬ ‭than the multiplier effect <0 of the increase in taxes.‬ ‭ eynesians have long relied on this for mq:‬ K ‭-We can revive economic activity without resorting to budget deficits.‬ ‭-We must favor recovery policies by increasing G rather than lowering taxes.‬ ‭ lso, counter-cyclical impact of the budget outside of politics:‬‭stabilizing effect‬‭-revenues‬ A ‭decrease and expenses increase (‬‭scissor effect‬‭) during‬‭recession and vice versa during‬ ‭recovery.‬ ‭ )‬ b ‭The effectiveness of budgetary policy in view of past experiences:‬ ‭The 30G corresponds to the golden age of fiscal policy (then it is the rule‬ ‭that dominates)‬‭PB is only occasional and in exceptional‬‭circumstances between‬ ‭2G.‬ ‭Becomes the standard for 30G - State wants to smooth out cyclical fluctuations by adopting stop‬ ‭and go policies.‬‭Stop and go‬‭=lower public spending‬‭and/or higher taxes due to overheating (thus‬ ‭austerity), and higher spending and/or lower taxes due to recession (thus relaunch).‬ ‭Please note: stop and go is different from auto stabilization. Stab auto is automatic (increase‬ ‭in expenses and reduction in revenues because there are more unemployed people to‬ ‭subsidize and reduce in the Y, it does not depend on a discretionary policy).‬ ‭We thought that the budget deficit would be acceptable at CT because the additional - obtained will‬ ‭allow an increase in ex post revenues which cover the initial deficit.‬ ‭An example through the “New Economics” of Kennedy and Johnson, an exemplary‬ ‭recovery policy:‬‭Keynesian recovery (go) between 1961‬‭and 1968: It is oriented according to‬ ‭ time horizons:‬ 2 ‭-Regulation of CT is ensured by the PB. Initial deficit filled by the multiplier effect of public spending‬ ‭and‬ ‭additional tax revenues. From 1961 to 1965: public spending increased by $30 billion and taxes‬ ‭reduced by $15 billion.‬ ‭-Success: State budget in surplus in 1964 and 1965 (confirmation of the multiplier) + TCAM= 5%‬ ‭between 1961 and 1966.‬ ‭-At the same time, the monetary policy of the FED is – restrictive: reduction in long-term interest‬ ‭rates‬ -‭ Perspective of LT consists of proposing the policy of “well-being” (‬‭Welfare State‬‭, based on 1 +‬ ‭great social solidarity and justice in terms of housing, health, education, etc. thanks to the‬ ‭redistributive intervention of the Welfare State).‬ ‭-Success: Unemployment rate = 3% of active population increase - (5% on 61-66). But at the cost‬ ‭of strong inflationary tensions maintained by the “price-wage” loop: inflation increased by 15%‬ ‭between 1950 and 1961; hence an increase in wages, causing an “overheating” of the economy.‬ ‭ n example of a stop policy, the Pinay-Rueff plan in 1958:‬ A ‭-To restore public finances and the external balance to avoid overheating of the economy:‬ ‭56-58: strong inflation in France (15%) + strong -. French budgetary crisis due to military‬ ‭financing in Algeria / end of Marshall Aid for reconstruction / structural reasons (subsidy to‬ ‭national E and protected sectors). Infla fueled by continuous increase in wages because of‬ ‭indexation since 1950.‬ ‭ ueff (liberal) proposes a recovery plan put in place in 1958 by Pinay to eradicate inflation and‬ R ‭reduce budget deficit - increased tax grab, public tariffs, lower subsidies and questioning of the‬ ‭indexation of wages (obviously devaluation and creation of 1 nv franc).‬