Treasury Secretary Geithner, as quoted in the Wall Street Journal, August 2, 2009. “… while there were signs that the recession was easing, a key element to getting the U.S. economy back on track was to bring down the country”s surging deficits. We will not get this economy back on track. … unless we can convince the American people that we”re going to have the will to bring these deficits down. …” You are asked to present to your employee pension management team an assessment on the following.
a. Discuss your thoughts on the inside/outside lag that the secretary faces on altering fiscal policy.
b. Discuss your thoughts on what is the impact of the current large fiscal stimulus package on growth, inflation, interest rates, and the dollar.
c. Differentiate the impacts of sustained current policy on your four benchmark variables compared to Geithner”s suggestion that future policy will bring deficits down. How might global (e.g., Chinese) investors react?
d. If the Fed altered its current easy policy with an effective exit strategy to withdraw liquidity, how might this reinforce/frustrate Geithner”s policy with respect to the expected outcomes on your four benchmark variables?
e. How would you suggest the committee view Geithner”s comments with respect to your understanding of adaptive/rational expectations and the role of the Lucas Critique?