Three Instruments and Three Objectives: A Framework for Analysis

Abstract

This chapter extends and builds upon the analysis in Chapter 4 relating to the use of two or more macroeconomic instruments to influence two macroeconomic objectives. But the extension of the analysis to include three macroeconomic objectives greatly extends the number of logically possible assumptions about the possible combinations of effects (their direction, and whether they are negligible) of each of the instruments upon each objective. For we now have to take account of the possibility that each of three instruments will affect each of the three objectives in an upward or a downward direction, or that the effect of an instrument on an objective may be negligible; also to take account of the fact that the direction in which any given instrument should be changed may depend upon the relative extent of the effect of each of the three instruments on each objective if appropriate policies are to be adopted to bring the state of the economy closer to the government’s macroeconomic objectives.