What ends recessions? Monetary or fiscal policy?

I read this long time pending paperfrom Romer Duo:

This paper analyzes the contributions of monetary and fiscal policy to postwar economic recoveries. We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries. Our estimates also indicate that on several occasions expansionary policies have contributed substantially to above-normal growth outside of recoveries. Finally, the results suggest that the persistence of aggregate output movements is largely the result of the extreme persistence of the contribution of policy changes. 

I don’t have a free version of the paper (NBER papers are not free for all). In all the paper says monetary stimulus alone is enough to get economies out of recession. Moreover, automatic fiscal policy works better than discretionary fiscal policy. But as the Chief economist for President Obama she is doing the opposite- discretionary fiscal stimulus.

If I add this paper to her Great Depression paper which says monetary policy alone was enough to cure depression, it seems monetary policy has an advantage compared to fiscal policy.

All this brings me back to the point I made earlier- Christina Romer says monetary policy works in research but believes fiscal policy can do the trick in this crisis. But why should this be? What is so different about this crisis that discretionary fiscal stimulus seems to be the answer?

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5 Responses to “What ends recessions? Monetary or fiscal policy?”

  1. Avid Reader Says:

    I am not an economist but is it because the Fed cannot cut interest rates anymore? Could it be that they cannot just print dollars and destroy its value?

    Soros said that the solution is to create inflation first and then destroy inflation.

    I do think all these measures currently under consideration will come to naught. The banks seem to be insolvent. They may eventually get nationalized. The crisis is very bad.

    • Amol Agrawal Says:

      Hi Avid Reader,
      I don’t know the reasons for this Romer twist/flip. Fed may have rates at zero but Bernanke (and numerous others) has showed Fed still can do a lot in zero interest rates.

      I think the main problem is what you said – “The banks seem to be insolvent” and till we don’t get a solution for them, we just don’t know the way out. When you have leverage ratios of 30+, it would require some undoing (damages) to get things on path.

      What is also worrying is this bonus talk. They still were paid USD 18.4 bn of bonuses!!

  2. All recessions end some day « Mostly Economics Says:

    [...] earlier (though am sure she is not answering me) but had also pointed this was similar in her other paper on recessions. In the latter paper she pointed that fiscal stimulus is usually late and small. So, this does fix [...]

  3. Barro on Fiscal Multipliers, Romer and Great Depression « Mostly Economics Says:

    [...] because fiscal stimulus was not tried which was a broad conclusion. On a closer look at another Romer paperone gets the same conclusion – fiscal policy was not tried much and mon policy helps in most [...]

  4. Fiscal Multiplier Debate « Mostly Economics Says:

    [...] because fiscal stimulus was not tried which was a broad conclusion. On a closer look at another Romer paper one gets the same conclusion – fiscal policy was not tried much and mon policy helps in most [...]

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