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Re: XAO Analysis
The way the system of the economy operates is complex, time lags add to the complexity policy writers face, these factors combined make counter-cyclical macroeconomic policy impractical, as witnessed in the above example. In some cases governmental actions can actually worsen the state of the economy when trying to use monetary and fiscal policy to “fine tune” the business cycle.
Finally, effects of policy taken today will impact on the economy over years, however, no-one is accurately able to forecast that far ahead. The forecast horizon of policy makers is less than one year. (McTaggart, 2002, 790). Furthermore, it is not possible to predict the exact timing and magnitute of the effects policy will have on the economy. (McTaggart, 2002). Clearly it is evident time lags make counter-cyclical macroeconomic policy impractical.
The business cycle is inherent to any economy, characterised by expansion, peak, contraction and trough and driven by investment and the accumulation of capital. Governments use fiscal and monetary policy in order to attempt to fine-tune the business cycle. Fiscal policy is however, a plan for expenditures over multiple years and due to both recognition and administrative/political time lags is ineffective in the use of counter-cyclical policy. The crowding out effect further lags behind initial expenditures/tax cuts, leading to difficulties measuring the magnitute of economic effects for policy writers. Real-time output gaps can be measured relatively accurately, however the fact that no-one can ever predict the future leads to the notion that even the best forecasts may be badly flawed in hindsight. Quarterly national accounts data is further unreliable for economic estimates due to the time lags in the attainment of useful data. Furthermore, the majority of effects of monetary policy hit the economy over a year after initial action, thus due to time lags and the problems inherent in forecasting economic growth more than a year into the future, make “fine-tuning” the business cycle impractical. Finally, an example of the Australian economy in the early 90s recession, highlights the fact that time lags combined with the complex nature of the economy lead to policy producing detrimental economic results.
Cheers
Important part is the lags in data and time it takes for things to play out. We are just seeing the very tip of the iceburg IMHO. Give it another year or two until we really start to see some messy statistics. We are in the contraction phase, at the start of a recession IMO. At least in the US, which will of course, affect the global economy and hence, the XAO.
The way the system of the economy operates is complex, time lags add to the complexity policy writers face, these factors combined make counter-cyclical macroeconomic policy impractical, as witnessed in the above example. In some cases governmental actions can actually worsen the state of the economy when trying to use monetary and fiscal policy to “fine tune” the business cycle.
Finally, effects of policy taken today will impact on the economy over years, however, no-one is accurately able to forecast that far ahead. The forecast horizon of policy makers is less than one year. (McTaggart, 2002, 790). Furthermore, it is not possible to predict the exact timing and magnitute of the effects policy will have on the economy. (McTaggart, 2002). Clearly it is evident time lags make counter-cyclical macroeconomic policy impractical.
The business cycle is inherent to any economy, characterised by expansion, peak, contraction and trough and driven by investment and the accumulation of capital. Governments use fiscal and monetary policy in order to attempt to fine-tune the business cycle. Fiscal policy is however, a plan for expenditures over multiple years and due to both recognition and administrative/political time lags is ineffective in the use of counter-cyclical policy. The crowding out effect further lags behind initial expenditures/tax cuts, leading to difficulties measuring the magnitute of economic effects for policy writers. Real-time output gaps can be measured relatively accurately, however the fact that no-one can ever predict the future leads to the notion that even the best forecasts may be badly flawed in hindsight. Quarterly national accounts data is further unreliable for economic estimates due to the time lags in the attainment of useful data. Furthermore, the majority of effects of monetary policy hit the economy over a year after initial action, thus due to time lags and the problems inherent in forecasting economic growth more than a year into the future, make “fine-tuning” the business cycle impractical. Finally, an example of the Australian economy in the early 90s recession, highlights the fact that time lags combined with the complex nature of the economy lead to policy producing detrimental economic results.
Cheers
Important part is the lags in data and time it takes for things to play out. We are just seeing the very tip of the iceburg IMHO. Give it another year or two until we really start to see some messy statistics. We are in the contraction phase, at the start of a recession IMO. At least in the US, which will of course, affect the global economy and hence, the XAO.
