Tuesday, February 25, 2014

The effect of the ARRA

I had previously looked into the effect of the ARRA ('the stimulus'), but I forgot to include the effect of the tax cut component (which I was reminded of by this Krugman lecture). So here's an update; I've also updated these with the more accurate monetary model. Here are the results as a rather sparse gallery of graphs.

Here is the effect on the price level (pretty small):


Here is the effect on inflation (it generates a spike of inflation at the onset and takes it back as the stimulus fades):


Here is the effect on interest rates ("crowding out" of about 20 basis points on long term rates, about 5 bp on short term rates):


Here is the effect on unemployment:


Here is the change in unemployment rate (it shaved about 2.5 percentage points off the peak):


Here is the effect on RGDP:


And finally, here is an "apples to apples" comparison with the other estimates from the table in Krugman's lecture linked above (the information transfer model is basically in line with these, the shaded region is the CBO estimate which was given as upper and lower bounds):


This model ignores the "interest rate channel" in the sense of the IS-LM model (see e.g. here). This turns out to be a pretty good assumption as I discuss in the next post!

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