Macroeconomic policy: Difference between revisions
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a [[panic (banking)|banking panic]] or the bursting of an [[asset price bubble|housing price bubble]]. It is about decisions | a [[panic (banking)|banking panic]] or the bursting of an [[asset price bubble|housing price bubble]]. It is about decisions | ||
taken in advance of 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 advance of 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. | |||
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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 | 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 | ||
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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]]. | 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]]. | ||
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Revision as of 09:57, 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 advance of 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.