Some Implications of Endogenous Stabilization Policy
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 treata s 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 soon should 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.
Gordon S. Rentschler Memorial Professor of Economics - Princeton University
Former Brookings Expert