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De Economist

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

On the theory of macroeconomic policy

  • James Tobin
Article

Summary

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.

Keywords

Exchange Rate Monetary Policy Foreign Exchange Simple Correlation Empirical Estimation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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References

  1. Barro, Robert, 1974, ‘Are Government Bonds Net Wealth?,’Journal of Political Economy, 82, pp. 1095–1117.Google Scholar
  2. Brainard, William C., 1967, ‘Uncertainty and the Effectiveness of Policy,’American Economic Review, 57, pp. 411–425.Google Scholar
  3. Kydland, F.E. and E.C. Prescott, 1982, ‘Time to Build and Aggregate Fluctuations,’Econometrica, 50, pp. 1345–1370.Google Scholar
  4. Lucas, Robert E., 1976, ‘Econometric Policy Evaluation: A Critique,’ in: K.. Brunner and A. Meltzer (eds.),The Phillips Curve and Labor Markets, Amsterdam.Google Scholar
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  6. Tinbergen, Jan, 1952,On the Theory of Economic Policy, Amsterdam.Google Scholar
  7. Tinbergen, Jan, 1956,Economic Policy: Principles and Design, Amsterdam.Google Scholar
  8. Tobin, James, 1983, ‘Financial Structure and Monetary Rules,’Kredit und Kapital, 16, pp. 155–171.Google Scholar

Copyright information

© H.E. Stenfert Kroese B.V. 1990

Authors and Affiliations

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

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