When thinking about fiscal policy, we talk about the fiscal impulse. "Neutral" policy would be the deficit you ran last year or quarter - a smaller deficit is contractionary, not stimulative, relative to state of the economy before the change.
I get that maintaining risk-free short-term rates above r* is contractionary, in some way - that…
When thinking about fiscal policy, we talk about the fiscal impulse. "Neutral" policy would be the deficit you ran last year or quarter - a smaller deficit is contractionary, not stimulative, relative to state of the economy before the change.
I get that maintaining risk-free short-term rates above r* is contractionary, in some way - that it is a restrictor plate on what the economy would do otherwise. But if the economy is showing no sign of slowing GDP growth, increased unemployment, or below target inflation, what's the rush to change the policy stance? Sure, you want to get to r* eventually, but if you do it quickly the odds of overheating seem high.
When thinking about fiscal policy, we talk about the fiscal impulse. "Neutral" policy would be the deficit you ran last year or quarter - a smaller deficit is contractionary, not stimulative, relative to state of the economy before the change.
I get that maintaining risk-free short-term rates above r* is contractionary, in some way - that it is a restrictor plate on what the economy would do otherwise. But if the economy is showing no sign of slowing GDP growth, increased unemployment, or below target inflation, what's the rush to change the policy stance? Sure, you want to get to r* eventually, but if you do it quickly the odds of overheating seem high.