Chapter 15 - Stabilization Policy - Activist vs. Nonactivism
See opening quote by Robt. Gordon, p. 385.
Or another example - you get sick, take medication, but the medication has a three day
Driving your car by looking in the rear view mirror.
See graphs on page 387 and 389. Economic instability and monetary instability.
Possible strong link between these two variables.
Widespread agreement about the goals of macro policy: low un, high levels of
employment, real output growth, low and stable inflation, etc. The debate in macro is
between activist vs. nonactivist (passive) approach to policy. Rules vs. discretion
Passive, Rules Approach: fixed money growth, balanced budget amendment, term
limits, flat tax, expiration dates on legislation, etc. Maintain stable, predictable fiscal
and monetary policy during all phases of the business cycle. Don't attempt
countercyclical fine-tuning, it will be destabilizing.
Historical consensus, traditional view:
Market economy failed in the 30s, self-correcting mechanisms didn't work,
government intervention is what finally rescued the economy. Led to the growth in
Keynesian economics, dominated the economics profession and strongly influenced
policymakers - Congress and presidents. "We're all Keynesians now."
In the 50s and 60s, economists and policymakers became confident in the Keynesian
approach - activist, stabilization policy, mostly fiscal policy. During a recession: run a
budget deficit and have expansionary monetary policy. During an expansion, run a
budget surplus and contractionary monetary policy. More faith in the ability of
policymakers to smooth economic flucuations than in the self-correcting mechanisms
of the market economy.
What about the problem with lags? Page 393-395. Recognition lag, policy lag and
Possible solution to Lags: Forecasting Tools.