Introductie Flashcards
What do policymakers do in practice?
- Make laws regarding economy
- Collect and spend taxes
- Produce public goods (Public transportation, hospitals)
- Guarding/managing the national currency
- International exchange
How do policymakers work together?
These policymakers work together in institutions (National Bank), and use instruments (Fiscal/monetary policy) to achieve their goals (price stability or full employment)
“To reach your objectives, you must
have at least as many independent
instruments as you have objectives”
- Jan Tinbergen.
Explain with an example
If you have less instruments, there are inevitably trade-offs to be made.
For example:
“How much more wage inequality the government stands ready to accept to reduce the unemployment rate by one percentage point?”
The three key functions of economic policy: Allocation Function
Deals with the correct and efficient distribution of goods
For example:
- Preventing monopolies with competition policy / antitrust laws
- Limiting external effects, for example by addressing climate change through emission rights
- Address incomplete information (more clarity for consumers), for example through accounting laws
The three key functions of economic policy: Stabilisation Function
Prevent or limit fluctuations (of things like unemployment, total output of a country, prices, supply&demand,…)
Ensuring stable economic growth
Provide guarantees such as Draghi’s famous quote; ‘We will do whatever it takes’.
The three key functions of economic policy: Distribution function
- Bringing more fairness, for example by taxing the rich and transferring them to poorer households
- Trying to achieve a Pareto optimal situation
- Trade-off between equity-efficiency
- Social welfare criteria are needed to make the right decisions.
Discretionary measures
Measures that are selected according to a more specific problem. Are often used when a problem has a lot of uncertainty. Active policy.
Predetermined policy rules
Economic measures that are inserted in advance and then just “do their thing”. Used in transparent, predictable situations. Passive policy.
The limits of economic policy: Information problems
Data issues (delay, wrong data, access)
Model uncertainty (e.g. specification, variables to be included, parameters estimated with uncertainty)
The limits of economic policy: Lucas critique
Changes in economic policy will affect the behaviour of private agents (households, firms)
Models that do not allow for agents to adjust their behavior cannot be used for policy
The limits of economic policy: Much debate over its effectiveness
Policy effectiveness depends on agents’ confidence: policy that is credible gains effectiveness and vice versa
Time inconsistency: situations where, with the passing of time, policies that were determined to be optimal yesterday are no longer perceived to be optimal today
The limits of benevolence
Electoral cycles and partisan preferences
Re-election motivations
Pressure from special interest groups
Macroeconomic perspective: Sustainable Economic Growth
Growth that does not occur at the expense of the well-being of future generations (due to predatory exploitation of the environment, for instance)
Growth that is accompanied by a fair distribution of income and wealth within the population.
Macroeconomic perspective: Balanced growth
Optimal utilization of the labor supply (frequently referred to as ‘full employment’)
Price stability (low inflation)
Stable balance of payments (no excessive current account deficit) and the associated preservation of international competitiveness
Balanced public finances (essentially a sustainable public debt)
VUCA World
Volatile, Uncertain, Complex, Ambiguous
The acronym came into common usage in the late 1990s to describe the world’s new reality.
Chaordic
Combination of Chaos en Order
Conceived in the wake of the 2008 crisis. When many laws and regulations were devised to monitor everything
All sorts of indices were devised to “measure” uncertainty
A constantly changing environment: Shocks What? + Example Time? Effect? Cause?
Concentrated events which impact the economy in a positive/negative way
Short term
Destabilizing, not always transformational
Mostly change in exogenous factors
A constantly changing environment: Regime Changes What? + Example Time? Effect? Cause?
Change of order, establishment of new organisations, institutions
Mostly transformational, permanent or long-term change
Substantial social and/or economic impact
Orderly or disorderly
A constantly changing environment: Chaos What? + Example Time? Effect? Cause?
The sudden transition from a situation of high
predictability to one of high uncertainty (Berlin Wall)
Small changes with huge consequences
Highly destabilizing, usually transformational
A constantly changing environment: Mega trends What? Time? Effect? Cause?
Gradual transformation over the longer term
Predictable, but affect society and economy in a complex way and thus full social/economic impact is often very uncertain
Whenever one asks economists about the next severe crisis, they will most likely refer to:
(1) a repetition of facts that already happened in the past
(2) an escalation/worsening of events that happened very recently or are happening
at this very moment
Employment growth versus productivity growth
- In some European countries fewer people work, but those who work have a high level of productivity. Other countries achieve much better performances about employment but at the price of weaker productivity.
- Answer to this trade-off: reshaping institutions (requiring supply-side policies), like for example more investment in education and lifelong learning, an environment that fosters innovation,…
