Christina Romer - Research

Research

Romer's early work focused on a comparison of macroeconomic volatility before and after World War II. Romer showed that much of what had appeared to be a decrease in volatility was due to better economic data collection, although recessions have become less frequent over time.

She has also researched the causes of the Great Depression in the United States and how the US recovered from the depression. Her work showed that the Great Depression occurred more severely in the US than in Europe, and had somewhat different causes than the Great Depression in Europe. Romer showed that fiscal policy played a relatively small role in the recovery from the depression in the US, because taxes were raised in the US almost as quickly as government spending increased during the New Deal. However, accidental monetary policy played a large role in the US recovery from depression. This monetary policy came first from the devaluation of the dollar in terms of gold in 1933-1934, and later from the flight of European capital to the relatively stable US as war in Europe became more likely.

She has done extensive work on fiscal and monetary policy from the Great Depression to the present, using notes from the meetings of the Federal Open Market Committee (FOMC) and the materials prepared by Fed staff to study how the Federal Reserve makes its decisions. Her work suggests that some of the credit for the relatively stable economic growth in the 1950s should lie with good policy made by the Federal Reserve, and that the members of the FOMC could at times have made better decisions by relying more closely on forecasts made by the Fed professional staff.

Her recent work (with David Romer) has focused on the impact of tax policy on government and general economic growth. This work looks at the historical record of US tax changes from 1945-2007, excluding "endogenous" tax changes made to fight recessions or offset the cost of new government spending. It finds that such "exogenous" tax increases, made for example to reduce inherited budget deficits, reduce economic growth (though by smaller amounts after 1980 than before). Romer and Romer also find "no support for the hypothesis that tax cuts restrain government spending; indeed ... tax cuts may increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases." However, she notes that "Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent."