Key points of chapters 15 and 16

Topic	"Activists"	"Non-Activists"
Source of instability	"Shocks" -- economy inherently unstable	Bad policy often the source
Speed of self-correction	Slow, therefore high cost	Acceptable, if not hindered by bad policy
Timing of discretionary action	Difficult but possible to get right	More often wrong than right -- discretion is ineffective as stabilization tool
Impact of rules	Preventing reaction to events would increase instability	Rules --> stable policy --> stable economy
How?	Use leading indicators, forecasting models, etc to set policy	Set simple rules, such as M_sgrowth, Money GNP growth, or inflation target

Effects of Public Debt

Internally held Externally held

NO extra resources -- transfer of purchasing power from one group to another Provides extra real resources now (imports can exceed exports), so potentially more capital investment now.

Service has no real cost to society as a whole -- again a transfer from one group to another -- except (1) deadweight loss of taxes; (2) any effects on capital formation Service has a real cost to society -- real resources must be transferred to foreigners outside the society.

Effects of Public Debt on Capital Formation

"Traditional View" "New Classical View"

Bonds are viewed as wealth by holders, so Consumption rises; borrowing increases i, r, so I goes down (crowding out). Partly offset by foreign finance inflows, but that has a real future cost. Future taxes to service them offset value of bonds ["Ricardian Equivalence"]; any tax reduction is saved to finance future tax payments, no effect on i, r, no effect on Cons or I.

Empirical evidence?
Mixed -- subject to interpretation difficulties -- should data be nominal or real? What should be base period? Majority probably favors "traditional view"

Internally held	Externally held
NO extra resources -- transfer of purchasing power from one group to another	Provides extra real resources now (imports can exceed exports), so potentially more capital investment now.
Service has no real cost to society as a whole -- again a transfer from one group to another -- except (1) deadweight loss of taxes; (2) any effects on capital formation	Service has a real cost to society -- real resources must be transferred to foreigners outside the society.

"Traditional View"	"New Classical View"
Bonds are viewed as wealth by holders, so Consumption rises; borrowing increases i, r, so I goes down (crowding out). Partly offset by foreign finance inflows, but that has a real future cost.	Future taxes to service them offset value of bonds ["Ricardian Equivalence"]; any tax reduction is saved to finance future tax payments, no effect on i, r, no effect on Cons or I.
Empirical evidence? Mixed -- subject to interpretation difficulties -- should data be nominal or real? What should be base period? Majority probably favors "traditional view"