Government and Economy


Governmentand Economy

Accordingto Fishback(2010),an integral part of adequate study of monetary economics is theknowledge on the degree of sensitivity of the economy to policiesinfluencing it. This requires the ability to separate changes withinand without the economy under study so as to properly quantify theeconomic sensitivity to imposed regulations. Most past reports on thesame matter suggest minimal effect of these regulations in theeconomic transformation and shaping. A less general approach to thisissue can give more logical and less biased points on which decisionscan be based in the future to protect the economy as a whole from thenegative impacts of improper policy making and imposing.

OliverCoibion, the author of the article &quotArethe Effects of Monetary Policy Shocks Big or Small?&quottriesto look into detail the gravity of the effects of governmentinterference in the functioning of the State economy at both smallscale and large scale levels. The article considers the factorsaffecting the impacts of different government policies imposed by theState on the economy. Theauthor also tries to demystify the misconceptions presented byprevious reports on the issue of monetary restrictions imposed by thestate. The works considered by the author are the monetary VARliterature, which implies limited effects of state controls and theTaylor rule concept of Romer and Romer in 2004, which portrays majoreffects of such state regulations on the economy both of which arerelevant pieces in the economic responses towards the governmentregulations experienced since way back in history.

Thiswas a follow up research to cross check the validity of viewspresented in the named previous research works. Therefore, it doesnot highlight fresh independent objectives. It also does not seek topreset results, but tries to look into the contents of previous viewsby qualitative and quantitative analysis of issues raised by otherauthors on the same subject.

Oliverpoints out in his report that the differences in opinions of previousanalysts were based on different factors that affect the level ofimpact of any government regulation on the economy. For instance, VARconsidered unanticipated monetary regulation restrictions which areassociated with minor fluctuations in interest rates instead of therelevant improvements suggested by Romer and Romer. The force behindthe changes in interest rates due to state regulations if adjustedclears the difference in opinions from the two past methods ofanalysis.

Inaddition, the regulatory interval structures for both earlier methodsinfluence the magnitude of presumed policy effects. VAR approachesthis issue more objectively compared to the narrow minded approach byRomer and Romer. A better qualitative analysis strategy such as themodel-averaging procedure would easily clear the difference in viewsexpressed by the two reports. Finally, the timing of the policytargeting the state funding had substantial effect on its increasedimpact to the economy. Dropping the time period of a policy wouldeasily bring into an agreement of the two differing views on thematter (Olivier, 2012).

Ultimately,this article brings out the more objective point of view expressed byRomer and Romer in 2004 that the monetary policy upsets have asignificant effect on the state of the economy at macro level assuggested by VAR report in the period between 1970s and early 1980s.This serves to separate the facts from general assumptionssurrounding the whole matter of economic changes as a result ofpolicies imposed by the government to control monetary circulations(Alesina &amp Rosentha, 2011). Therefore, the government seems tohave role in coming up with policies regulating the economy.

Thepolitical science concept that can be connected with the article,&quotArethe Effects of Monetary Policy Shocks Big or Small?&quot,is that of power. The government is seen to have the power of makingmonetary policies that regulate the economy. It is through this powerthat the effect of monetary policy can be big or small. This dependswith the monetary policy instruments that the government decides touse since it has the power of using any of the instruments inregulating the economy.


Alesina,A., &amp Rosenthal, H. (2011). Partisanpolitics.Cambridge [England: Cambridge University Press.

Fishback,P. V. M. (2010). Governmentand the American economy: A new history.Chicago: University of Chicago Press.

Olivier,C. (2012). &quotArethe Effects of Monetary Policy Shocks Big or Small?,&quotAmerican Economic Journal: Macroeconomics, American EconomicAssociation, vol. 4(2), pages 1-32.

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