Wednesday, November 12, 2014

"This was a direct challenge to Keynesian-style fiscal policy and ushered in monetarism."

From my monthly RePEc stats I got to Top 25 Working Papers by File Downloads 2014-10, where the top item was How did we get to where we are now? Reflections on 50 years of macroeconomic and financial econometrics by Michael Wickens.

It's a 53-page PDF; I'll never get to the end of it. I have to say, though, that it is fascinating -- and easy reading, far as I've got. This is from the opening of Section 2: Macroeconomic models:
This procrustean approach to macroeconomic modelling was challenged by a number of undermining analyses that achieved considerable prominence and led to the increased use of small-scale models. One of the first such studies was by Anderson and Jordan (1968) who found that in a simple regression of output on distributed lags of the money supply and government expenditures, it was money that was significant and not government expenditures. This was a direct challenge to Keynesian-style fiscal policy and ushered in monetarism.

So by page eight, I tripped over the sentence that serves as the title of this post, sending me off in search of Anderson and Jordan (1968). I want to know what years Andersen and Jordan studied, that gave them the results they got.

Why? Because the economy changes, that's why.

Anderson and Jordan found that
it was money that was significant
and not government expenditures.

Andersen and Jordan turned up at the St. Louis Fed: Monetary and Fiscal Actions: A Test of Their Relative Importance In Economic Stabilization (PDF, 14 pages).

Andersen and Jordan:

The data are seasonally adjusted quarterly averages for the period from the first quarter of 1952 to the second quarter of 1968.

So, yes: The Andersen & Jordan paper examines the economy's reactions in a brief window at a time when the economy's performance was particularly good.

The irony is that the economy's performance in the 1950s and '60s was particularly good because of the large amount of government expenditures in the 1940s.


The Arthurian said...

If you ignore the Federal government's massive wartime spending in the 1940s, you can do science that shows government expenditure was not an effective economic stimulant in the 1950s and '60s. Neat trick.

And that was what "ushered in monetarism".

Auburn Parks said...

Great post Art-

WWII deficit spending essentially reset the economy and laid the groundwork for decades of strong growth RE: demand. The spending came out of income and wealth.

Compare this to the post 1980's economy where incomes and wealth for the consumer classes stagnated leaving only spending through debt as the mechanism by which the economy grew.

Which doesnt bode well for the future as there are no indications of a reset, because of the irrational fear of deficits and the non-existent political power of workers to shift the shares of national income back to a more productive level.

Jazzbumpa said...

It's bad science. Small sample bias, for one thing - and right after their study period the regime change began.

Spending growth was broadly, though irregularly up through Q1 '67. After that, it fluctuated around the 10% level until the mid 80's. Down since then.


Jazzbumpa said...

Should include this chart.