De Economist

, Volume 138, Issue 1, pp 1–14 | Cite as

On the theory of macroeconomic policy

  • James Tobin


Jan Tinbergen originated the theory of policy in the 1950s. Here I apply it to contemporary macroeconomics. The two standard instruments of short-run demand management cannot achieve the two usual targets, full employment and price stability. With respect to those goals, these two instruments are collinear, except for small and transient effects on foreign exchange rates. But the mix of fiscal and monetary policies, relative to one another, does have important effects on the composition of national output, as between investment and consumption.

I point out that policy-makers, like portfolio managers, should diversify the instruments they use when they are uncertain of their effects. I discuss some pitfalls in the empirical estimation of policy effects, especially possible misinterpretations of simple correlations, and I note that policy rules cannot be invariant to changes in macroeconomic structure. I argue that policy ‘rules’ should involve responses to new information and in practice allow ‘discretion.’ Finally, I suggest that Tinbergen's theory of policy needs to be extended to policy coordination among nations.


Exchange Rate Monetary Policy Foreign Exchange Simple Correlation Empirical Estimation 
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Copyright information

© H.E. Stenfert Kroese B.V. 1990

Authors and Affiliations

  • James Tobin
    • 1
  1. 1.Yale UniversityNew Haven

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