Worth: Mankiw Economics 5e CHAPTER 14 Stabilization Policy 387 economic fluctuations. The historical record often permits more than one Interpretation. The Great Depression is a case in point. Economists' views on macroeconomic policy are often related to their views on the cause of the Depression. Some econ- omists believe that a large contractionary shock to private spending caused the Depression. They assert that policymakers should have responded by stimulating aggregate demand. Other economists believe that the large fall in the money sup- ply caused the Depression. They assert that the Depression would have been avoided if the Fed had been pursuing a passive monetary policy of increasing the money supply at a steady rate. Hence, depending on one's beliefs about its cause, the great Depression can be viewed either as an example of why active monetary nd fiscal policy is necessary or as an example of why it is dangerous CASE STUDY Is the Stabilization of the Economy a Figment of the Data? Keynes wrote The General Theory in the 1930s, and in the wake of the Keynesian revolution, governments around the world began to view economic stabilization as a primary responsibility. Some economists believe that the development of Keynesian theory has had a profound influence on the behavior of the economy. Comparing data from before World War I and after World War IL, they find that real GDP and unemployment have become much more stable. This, some Keynes- ians claim, is the best argument for active stabilization policy: it has worked. In a series of provocative and infuential papers, economist Christina Romer challenged this assessment of the historical record. She argues that the mea ared reduction in volatility reflects not an improvement in economic policy and performance but rather an improvement in the economic data. The older data are much less accurate than the newer data. Romer claims that the higher volatil- ity of unemployment and real GDP reported for the period before World War I is largely a figment of the data. Romer uses various techniques to make her case. One is to construct more accurate data for the earlier period. This task is difficult because data sources are not readily available. A second way is to construct less accurate data for the recent period-that is, data that are comparable to the older data and thus suffer from the same imperfections. After constructing new ""bad"data, Romer finds that the recent period appears almost as volatile as the early period, suggesting that the volatility of the early period may be largely an artifact of data construction Romer's work is part of the continuing debate over whether macroeconomic policy has improved the performance of the economy. Although her work remains controversial, most economists now believe that the economy in the aftermath of the Keynesian revolution was only slightly more stable than it had been before 3 Christina D Romer, "Spurious Volatility in Historical Unemployment Data, "Journal of Political Economy a Figment of the Data? "American Economic Review 76(June 1986): 314-337 he postwar Economy 94(February 1986): 1-37; and Christina D. Romer, ""Is the Stabilization of User JoENA: Job EFFo1430: 6264_ch14: Pg 387: 27873#/eps at 100sl Mon,Feb18,20021:034MUser JOEWA:Job EFF01430:6264_ch14:Pg 387:27873#/eps at 100% *27873* Mon, Feb 18, 2002 1:03 AM economic fluctuations. The historical record often permits more than one interpretation. The Great Depression is a case in point. Economists’ views on macroeconomic policy are often related to their views on the cause of the Depression. Some econ￾omists believe that a large contractionary shock to private spending caused the Depression.They assert that policymakers should have responded by stimulating aggregate demand. Other economists believe that the large fall in the money sup￾ply caused the Depression. They assert that the Depression would have been avoided if the Fed had been pursuing a passive monetary policy of increasing the money supply at a steady rate. Hence, depending on one’s beliefs about its cause, the Great Depression can be viewed either as an example of why active monetary and fiscal policy is necessary or as an example of why it is dangerous. CHAPTER 14 Stabilization Policy | 387 CASE STUDY Is the Stabilization of the Economy a Figment of the Data? Keynes wrote The General Theory in the 1930s, and in the wake of the Keynesian revolution, governments around the world began to view economic stabilization as a primary responsibility. Some economists believe that the development of Keynesian theory has had a profound influence on the behavior of the economy. Comparing data from before World War I and after World War II, they find that real GDP and unemployment have become much more stable.This,some Keynes￾ians claim, is the best argument for active stabilization policy: it has worked. In a series of provocative and influential papers, economist Christina Romer has challenged this assessment of the historical record. She argues that the mea￾sured reduction in volatility reflects not an improvement in economic policy and performance but rather an improvement in the economic data. The older data are much less accurate than the newer data. Romer claims that the higher volatil￾ity of unemployment and real GDP reported for the period before World War I is largely a figment of the data. Romer uses various techniques to make her case. One is to construct more accurate data for the earlier period.This task is difficult because data sources are not readily available. A second way is to construct less accurate data for the recent period—that is, data that are comparable to the older data and thus suffer from the same imperfections. After constructing new “bad’’ data, Romer finds that the recent period appears almost as volatile as the early period, suggesting that the volatility of the early period may be largely an artifact of data construction. Romer’s work is part of the continuing debate over whether macroeconomic policy has improved the performance of the economy. Although her work remains controversial, most economists now believe that the economy in the aftermath of the Keynesian revolution was only slightly more stable than it had been before.3 3 Christina D. Romer, “Spurious Volatility in Historical Unemployment Data,’’ Journal of Political Economy 94 (February 1986): 1–37; and Christina D. Romer, “Is the Stabilization of the Postwar Economy a Figment of the Data?’’American Economic Review 76 ( June 1986): 314–334