Towards the Formulation and Testing of a More General Theory of Macroeconomic Policy (1987)

Abstract

Virtually all the macroeconomic policy discussion in the literature is based on a very limited number of the possible alternative combinations of assumptions about the effects of changes in particular policy instruments on the principal macroeconomic objectives. At the monetarist extreme, budgetary instruments are taken to have no impact on the real variable of unemployment (or real output), whereas monetary policy is taken to influence the price level, with no more than a short-run influence on unemployment. At the other (‘Keynesian’) extreme, all the instruments are taken to have similar effects to one another in reducing unemployment, for any given effect on nominal aggregate demand, an effect that is transferred to the price level as full employment is approached. The possibility of different macroeconomic instruments having different relative effects from one another on the price level and on unemployment respectively has been relatively little discussed. Nor has the possibility that one or more of those instruments may have no effect on one of those objectives, whereas another instrument may affect both objectives.

Originally published in Weltwirtshaftliches Archiv (Review of World Economics), 123(2) (1987). The authors gratefully acknowledge the comments from Duncan Ironmonger, Bob Jones, Ian McDonald and Kirker Stephens. The usual caveat applies.