Passive policy - Passive policy is not immune to the...

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Passive policy In contrast to active (or discretionary) policy is passive policy (or policy by rule). Under this system, macroeconomic policy is conducted according to a preset series of rules. These rules take into account many macroeconomic variables and dictate the best course of action given these conditions. For instance, a passive policy may follow the rule that in order to stabilize the economy the interest rate must be dropped one point whenever the nominal GDP falls one percent. The major advantage to passive policy is that it takes the short-term desires of policymakers out of the list of possible goals of macroeconomic policy. Instead, the policymakers are simply present to carry out the macroeconomic policy and to ensure that everything runs smoothly. Policy by rule uses policymakers to implement, rather than design, macroeconomic policy. Similarly, another advantage of passive policy is that the policy rules are based on optimizing the economy in the long run and are less likely to trade short run prosperity for long run growth.
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Unformatted text preview: Passive policy is not immune to the problems that plague active policy, however. For instance, passive policy must be written by policymakers at some point. Thus, policy rules can contain the biases of the policymakers of a different time--biases that are perhaps quite inappropriate to the current economic climate. And any outright errors in judgment or theory made by these policymakers will be incorporated into the rules and will thus be present as long as the rules are in effect. Which method of macroeconomic policy is better? Active policy relies on the judgment and character of policymakers to pursue the optimal long-term policies for the economy. Passive policy takes the power of choice away from policymakers and instead relies on the judgment and character of the writers of the rules. It is not clear that either method of policy is better. The majority of macroeconomic policy in the United States is active....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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