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Can a central bank accidentally provoke changes to a country's political regime? Sumner (2015) proposes that macroeconomic mismanagement on the part of central bank authorities, leading to declines in nominal output, can cause voters to respond with populism at the ballot box. Murphy and Smith (2018) have found evidence for this hypothesis, with populism interpreted as movements away from liberal market institutions. This article extends the hypothesis to macroeconomic mismanagement and its relationship with democratic political institutions. It finds both that recessions foreshadow a lower probability of a dictatorship becoming a democracy, and that a democracy is more likely to become a dictatorship. The relationship with autocratisation is most visible after 15 years, while the negative relationship with democratisation is far more persistent over time. These findings, it must be stressed, are historical and descriptive, not necessarily causal.

In the early 2000s, a small group of economists at Princeton University revived the debate over liquidity traps and developed a framework for monetary policy at the zero lower bound. Paul Krugman’s 1998 Brookings paper provides the basic model that underlies much of the new view, but work by Ben Bernanke, Michael Woodford, Gauti Eggertsson, and Lars Svensson also played an important role in reshaping our view of stabilization policy at the zero bound. By the late 2010s, their ideas had begun to influence policy at the Federal Reserve. Research by Krugman and other Princeton School members provided the rationale for the Fed’s new policy of flexible average inflation targeting, which is the most important shift in the Fed’s policy regime in several decades. Comparing the Princeton School to other recent developments such as market monetarism and NeoFisherism helps to illuminate both sets of ideas.

At least four heterodox theories have gained increasing popularity in response to the Great Recession. These include a revival of old Keynesian macroeconomics, the view that the central bank should try to prevent asset price bubbles, the NeoFisherian perspective, and market monetarism, which is my own view. All of these perspectives can be seen as the profession wrestling with the implications of near-zero interest rates. In my view, pre-2008 macro theory provides all of the tools we need to understand the Great Recession. A policy of nominal GDP targeting, perhaps guided by market forecasts, could have greatly moderated the 2007-09 slump.

Most research on the run-up in home prices before the Great Recession has focused on types of excessive demand—loose lending, foreign savings, loose monetary policy, speculation, bank deregulation, federal housing subsidies, etc. The focus on excess demand led to fatalism about the collapse in homebuilding that began in 2006 and the eventual recession and financial crisis that followed. Regardless of the sources of excess demand, a consensus developed that American spending had become unsustainably high because of a housing bubble and that demand needed to be reduced. Using a broad array of evidence, we find that constrained supply of new housing in key urban centers was the primary trigger for high home prices before the crisis. The recession and the financial crisis were the result of deliberate contractions of demand—both generally and specifically in residential investment—that were neither useful nor necessary. First, tightening monetary policy reduced aggregate spending and encouraged negative sentiment about real estate. Then, policy changes tightened lending standards and depressed housing markets for years after the 2008 financial crisis. A monetary policy regime targeting stable nominal income growth would have dramatically improved the economy during and after 2008.

Sumner (2015) proposes that macroeconomic mismanagement on the part of central bank authorities, which leads to declines in nominal output, will cause voters to respond with populism in the ballot box. Murphy and Smith (2018) previously found evidence for this hypothesis with populism interpreted as movements away from market liberal institutions. This paper extends the hypothesis to macroeconomic mismanagement and its relationship with democratic political institutions. It finds both that recessions foreshadow a lower probability of a dictatorship becoming a democracy, and a higher probability of a democracy becoming a dictatorship. The relationship with autocratization is most visible after fifteen years, while the negative relationship with democratization is far more persistent over time. These findings, it must be stressed, are historical and descriptive, not necessarily causal.

The purpose of this thesis is to explore the question why do not central banks target nominal GDP (NGDP). I find out with comparison of inflation targeting to NGDP targeting that they are different at supply-side shock but same at demand-side shocks. NGDP targeting at positive supply-side shock let the price level decline vice versa. Inflation targeting always tries keep inflation on the target, no matter what the direction of the supply-side shock is. In the case of comparison NGDP targeting to free-banking system I find out accordance in the question of fluctuation of the price level during demand and supply-side shocks. However these systems differ in the nature of structural problems of the economy. NGDP targeting has disadvantage in this area against free-banking system that it can cause bubbles on asset markets by unven increase of money supply and it can neglect real problems of the economy. Central banks and academic economists mostly agree that NGDP targeting is not suitable mainly due to problems with GDP data quality, threat of instable inflation and troubles with estimation of nature rate of output. In the meantime they prefer inflation targeting even though this monetary regime has showed its weaknesses too.

The monetarists are opponents of government intervention and supporters of free market processes. Keynesians are, conversely, supporters and advocates of government intervention and opponents of uncontrolled operation of the market mechanism. As opponents of government intervention, the monetarists do not agree that it should take countercyclical fiscal policy which can cause greater increase in expenditures of the public sector during the recession, but spending cuts in the period of expansion and that, consequently, the public expenditures continue to increase. However, Tobin, indicating a negative attitude, claims that inflation cannot be used as a reason to reduce the budget, if fiscal policy has little or no effect on income. Undesirability of countercyclical fiscal policy is a logical consequence of the monetarist views on the stability of the sector and better performance of the free market of government intervention in social reproduction. Rule on a constant rate of monetary expansion eliminates the need for conducting discretionary policy, as the Phillips curve, previously defined, does not allow an optimal combination of inflation and unemployment. Therefore, the use of money (and interest rates and bank loans), as the goal of monetary policy provides economic policy makers to focus on managing variability (i.e. concentrate to money supply), which is beyond the scope of operation of the market, on the one hand, and to let determining the interest rates of bank loans and the free market, on the other hand. Finally, monetarists are extremely concerned about the multiple connections between inflation and expansion of the public sector, for three reasons: first, inflation increases the share of the public sector (and exacts an increase in public expenditure), if a progressive tax system is functioning; second, combating inflation can only indirectly limit the expenditure of the public sector, as the government expenditures partly increase by inflationary financing; and third, financing the budget deficit with the primary issues typically involves inflationary effect, which, if it continues, initiates the process prices and wages control. The paper is based on theoretical analysis of the impact of state intervention in the sphere of stimulating economic recovery, growth and development.