Some Implications of Endogenous Stabilization Policy

Abstract

JUST AS EVERYBODY TALKS ABOUT the weather, every economist talks about endogenous stabilization policy, but nobody ever does anything about it. In recent years, the authors of numerous econometric studies of fiscal and monetary policy have warned that the policy variables that they treat as exogenous should perhaps be treated as endogenous if the stabilization authorities were pursuing an active countercyclical policy during the period in question. Typically, the warning is the last word on the subject; and so far as we know, no efforts have been made to investigate the kinds of difficulties this omission may cause. The idea that the typical stabilization policy variables-federal government purchases of goods and services, income tax rates, the monetary base (or unborrowed reserves), the Federal Reserve's discount rate, and so onshould perhaps be treated as endogenous in econometric studies raises a host of issues for the estimation and use of macro models. In this paper we hope to say something to three groups who are interested in the econometric approach to monetary and fiscal policies. * We wish to thank our colleagues Gregory C. Chow and Dwight M. Jaffee for helpful comments; Joshua Greene, John Ortiz, and Barry Schwartz for research assistance; and Ms. Betty Kaminski for quality typing under duress.

Monetary Versus Fiscal Policy Effects: A Review of the Debate

“…The issue in this case results from the endogeneity of policy actions, a topic that was investigated in detail by Goldfeld and Blinder (1972). The Goldfeld-Blinder paper correctly emphasizes the distinction between exogeneity, in the sense of coming from outside the private sector of the economy and exogeneity in the statistical sense.…”

Fiscal Policy in Macro Theory: A Survey and Evaluation

“…Another round of empirical discussion was unleashed by Leonall Andersen and Jerry Jordan (1968) with an article in the Review published by the Federal Reserve Bank of St. Louis. Other members (Michael Keran and Keith Carlson) of the St. Louis Fed's staff extended the discussion and so did Keynesian critics from the Board's staff in Washington (DeLeeuw and Kalchbrenner 1969) and the Brookings Institution (Goldfeld and Blinder 1972).…”

“…The exogeneity issue was further elaborated by Stephen M. Goldfeld and Alan S. Blinder (1972). The two authors explored in great and careful detail the implications of endogenous stabilization actions bearing on coefficient estimations in reduced forms.…”

The Impact of Monetary and Fiscal Policies on Real Output: A Re-examination

“…However, their results have been challenged on various grounds by several subsequent studies including Goldfeld and Blinder [3]; BM Friedman [4]; Darrat [5]; Fazzari [6]; Serletis and Koustas [7]; and Arestis and Sawyer [8,9], to name just a few (For more recent studies on the stabilization role of fiscal and monetary policies, see Charpe et al [10] and Farmer and Plotnikov [11] among others).…”