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| 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. | | 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. |
| The decisions required in both cases concern the selection of instruments and the determination of the magnitude and timing of their application. | | 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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| 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
| | ==Overview== |
| <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
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| 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]].
| | ==Historical background== |
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| | ==Recent developments== |
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Revision as of 16:22, 2 March 2013
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
Historical background
Recent developments
