Macroeconomic policy: Difference between revisions

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'''Macroeconomic policy''' is concerned with the use of the instruments of [[fiscal policy]] and [[monetary policy]] to counter the destabilising effects upon the economy of an [[shock (economics)|economic shock]] such as commodity price surge,
e Deputy Governor of the Bank of England has traced the evolution of monetary policy from the early post-war years when it was assigned only a marginal stabilisation role in favour of what was then thought of as the Keynesian use of fiscal policy -  through the unsuccessful attempts <ref> For an account of the British experiment in money supply targeting see Nick Gardner ''Decade of Discontent'', Chapter 5, Blackwell 1987</ref>in the 1980s to target the money supply,  that he attributes to [[monetarism]] to the current consensus, which he classifies as "the neo-classical synthesis" or as "new  Keynesian"<ref name=bean> [http://www.bankofengland.co.uk/publications/other/monetary/bean070413.pdf Charles Bean ''Is There a Consensus in Monetary Policy?'']</ref>. Before the [[Great Recession]], the  [[/Addendum#Jackson Hole consensus|Jackson Hole consensus]] gave  monetary policy the central stabilisation role, and the  "new consensus" that emerged during the recession, assigns a secondary a role  to [[fiscal policy]], but only  under exceptional circumstances. It thus adopts the classical contention of long-run neutrality of money and the sensitivity of expectations to the policy regime, together with the [[Keynesian theory]]'s contention that market rigidities result in a short-term trade-off between economic activity and inflation
a [[panic (banking)|banking panic]] or the bursting of an [[asset price bubble|housing price bubble]]. It is about decisions
<ref>Richard Clarida, Jordi Gali; and Mark Gertler, ''The Science of Monetary Policy: A New Keynesian perspective'', Journal of Economic Literature, December 1999</ref>. The magnitude of that tradeoff (termed the [[sacrifice ratio]]) depends primarily upon 
taken in anticipation of, or in response to, a [[downturn (economic)|downturn in economic activity]], and it is also about decisions concerning the [[fiscal consolidation]] measures needed to correct an increase in the [[budget deficit]] resulting from such a downturn.
labour market [[price flexibility]]<ref>[http://economia.unipv.it/pagp/pagine_personali/gascari/macro/ball_sacrifice%20ratio.pdf Laurence Ball: ''What Determines the Sacrifice Ratio?'', National Bureau of Economic Research, 1994]</ref>. The existence of a trade-off can reduce the credibility and effectiveness of monetary policy if it is believed that policy action will subsequently  be relaxed when the regulatory authority comes under political pressure to avoid any further reduction in economic activity (a problem that is termed [[time inconsistency]].
The decisions required in both cases concern the selection of instruments and the determination of the magnitude and timing of their application.
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==Overview==
The major influence upon macroeconomic policy is the understanding of the workings of the [[economic system]] that has been brought about by the study of [[macroeconomics]], but its conduct tends also to be influenced by [[politics#Political ideologies|political ideologies]], by [[Public debt#Attitudes to public debt|attitudes to public debt]], and by [[reflex|reflexive]] and analytical responses to the outcomes of previous policy applications.
 
==Historical background==
[[Recession]]s and lesser fluctuations have punctuated the growth of the major economies from time to time since the 18th century, but there was no policy response to any of the [[recession#The nineteenth century|recessions of the 19th century]] or before. In the early 20th century, the prevailing attitude to recessions was the teaching of the [[Austrian School of economics|Austrian School]] led by [[Friedrich Hayek]] in London, and supported by eminent American economists.  It was held that  to stimulate consumption through inflationary policies would perpetuate artificial demand and delay any real cure.  Harvard's Joseph Schumpeter argued that there was: :" a presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future;" - and that "depressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change."<ref>[[Joseph A. Schumpeter]], ''[http://books.google.com/books?id=MlXr6e4Opo0C&pg=PA117 Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism]'' (Transaction Publishers, 1989), 117.</ref>. That was the view of United States Secretary of the Treasury,  Andrew Mellon, (who has been quoted as advising President Hoover that the depression would "purge the rottenness out of the system") and it was shared by Britain's Chancellor Phillip Snowden.<ref>[http://krugman.blogs.nytimes.com/2007/11/07/purging-the-rottenness/ Paul Kugman: ''The Conscience of a Liberal'', New York Times November 7 2007]</ref> They agreed that  expansionary monetary and fiscal policies should be avoided because they would reduce investor confidence and hinder the  resumption of private investment.  
 
The first example of an active macroeconomic policy was the [[New Deal]] response to the [[Great Depression]] of the 1930s, although it involved a [[fiscal stimulus]] that was small by comparison with the loss of output that had occurred. By the 1940's, however,  [[John Maynard Keynes]]' proposal that  governments should  counter downturns in demand by cutting taxes or increasing public expenditure, had achieved the status of orthodoxy, and  a Keynesian consensus dominated the macroeconomic policies of the developed countries for two or three decades following the second world war.
 
==Recent developments==
 
 
 
{{reflist}}

Latest revision as of 17:37, 3 March 2013

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Macroeconomic policy is concerned with the use of the instruments of fiscal policy and monetary policy to counter the destabilising effects upon the economy of an economic shock such as commodity price surge, a banking panic or the bursting of an housing price bubble. It is about decisions taken in anticipation of, or in response to, a downturn in economic activity, and it is also about decisions concerning the fiscal consolidation measures needed to correct an increase in the budget deficit resulting from such a downturn. The decisions required in both cases concern the selection of instruments and the determination of the magnitude and timing of their application.

Overview

The major influence upon macroeconomic policy is the understanding of the workings of the economic system that has been brought about by the study of macroeconomics, but its conduct tends also to be influenced by political ideologies, by attitudes to public debt, and by reflexive and analytical responses to the outcomes of previous policy applications.

Historical background

Recessions and lesser fluctuations have punctuated the growth of the major economies from time to time since the 18th century, but there was no policy response to any of the recessions of the 19th century or before. In the early 20th century, the prevailing attitude to recessions was the teaching of the Austrian School led by Friedrich Hayek in London, and supported by eminent American economists. It was held that to stimulate consumption through inflationary policies would perpetuate artificial demand and delay any real cure. Harvard's Joseph Schumpeter argued that there was: :" a presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future;" - and that "depressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change."[1]. That was the view of United States Secretary of the Treasury, Andrew Mellon, (who has been quoted as advising President Hoover that the depression would "purge the rottenness out of the system") and it was shared by Britain's Chancellor Phillip Snowden.[2] They agreed that expansionary monetary and fiscal policies should be avoided because they would reduce investor confidence and hinder the resumption of private investment.

The first example of an active macroeconomic policy was the New Deal response to the Great Depression of the 1930s, although it involved a fiscal stimulus that was small by comparison with the loss of output that had occurred. By the 1940's, however, John Maynard Keynes' proposal that governments should counter downturns in demand by cutting taxes or increasing public expenditure, had achieved the status of orthodoxy, and a Keynesian consensus dominated the macroeconomic policies of the developed countries for two or three decades following the second world war.

Recent developments