The appropriate role of fiscal policy in recovering from the 2007-2008 crisis was one of the most high stakes macroeconomics debates over the last decade. This debate was also highly contentious, earning it the name, “The Macro Wars.” Out of this debate emerged a “New View” of the appropriate role of fiscal policy, as described in the article by Jason Furman. Your task in this assignment is to write an essay in which you 1) describe how the New View of fiscal policy emerged from the Old View, and 2) Critically evaluate the strengths and weaknesses of the New View.
There are several readings for this essay on the Supplemental Reading list on Brightspace, under the heading “Debate Over Fiscal Policy.” For this essay begin with the Jason Furman article to get a sense of the debate, and then read the articles by Paul Krugman and John Cochrane. The body of your essay will need at least the following components, in this order:
Describe John Cochrane’s argument opposing fiscal stimulus. This description needs to include a brief summary of: 1) The main theory he cites concerning the effectiveness of fiscal stimulus, 2) any empirical evidence or considerations Cochrane uses to support his claim, 3) Cochrane’s evaluation of the main dangers associated with the choice to conduct fiscal stimulus or not, and 4) whether his view represents the “Old View,” or “New View”
Describe Paul Krugman’s arguments for fiscal stimulus. This description needs to include 1) the model Krugman uses to support his arguments, 2) any empirical evidence or considerations Krugman uses to support his argument, 3) Krugman’s evaluation of the main dangers associated with the choice to conduct fiscal stimulus or not, and 4) whether his view represents the “Old View,” or “New View.”
Describe how Furman adjudicates the competing claims between Krugman and Cochrane. What theoretical and empirical evidence does he use to adjudicate the competing claims? What evidence does Furman use in his evaluation of the dangers associated with the choice to conduct fiscal stimulus or not? How does the “New View” evolve from the “Old View”? In this portion, it would also likely make sense to include how Krugman and Cochrane responded to each other, as well as responses from other authors on the reading list like Delong, Thoma, Summers, and Fama.
What is your evaluation of the strengths and weaknesses of the New View? Remember: your evaluation of the New View is your main argument in this paper, and so should 1) structure how you present the material in the 3 portions above, and 2) have a sufficient amount of space devoted to it so that you can give a thorough and specific evaluation. This will take more than a single paragraph. To do an excellent job on the critical evaluation, you would be well served to use the research cited in Furman’s paper.