Some Implications of Endogenous Stabilization Policy

JUST AS EVERYBODY TALKS ABOUT the weather, every economist talks about endogenous stabilization policy, but nobody ever does anything about it. In recent years, the authors of numerous econometric studies of fiscal and monetary policy have warned that the policy variables that they treat as exogenous should perhaps be treated as endogenous if the stabilization authorities were pursuing an active countercyclical policy during the period in question. Typically, the warning is the last word on the subject; and so far as we know, no efforts have been made to investigate the kinds of difficulties this omission may cause.