Fiscal and monetary policy evolved significantly over the recent decades. Traditional Keynesian models are being challenged by new theories, including Modern Monetary Policy and Neo-Keyesian perspectives. In the context of public sector finance and financial management challenges that were created or accelerated during the covid crisis, and in consideration of rapidly changing demographic realities in most nations, a revision of the existing system is in order if our science is to be an effective tool for evaluating and planning public policy going forward.
YHR Fall 2023 Issue (Joseph Manning Interview) (2).pdf
Fiscal and Monetary Macroeconomic Policy
1. Fiscal and Monetary Policy
Macroeconomic Policy
prepared by: William P Kittredge, PhD
presented: 16 August 2023
2. Macroeconomics – Keynesian Approach
●
Focuses on the role of aggregate demand in driving economic growth
●
Government intervention can be used to stabilize the economy during
periods of recession or depression
●
Justification for government intervention in markets
3. Macroeconomics – Keynesian Approach
●
Keynesians advocate for active government intervention through fiscal policy
(government spending and taxation) and monetary policy (central bank
actions) to manage the business cycle and stabilize the economy.
●
The theory emphasizes that increasing aggregate demand, primarily through
consumer spending and government investment, can help stimulate economic
growth and reduce unemployment.
●
Keynesians argue that in the short run, the economy may not automatically
reach full employment, and temporary periods of intervention may be
necessary. However, in the long run, the economy can self-correct and reach
full employment equilibrium.
4. Macroeconomics
●
Macroeconomics is a branch of economics that deals with the study of
the economy as a whole.
●
It focuses on understanding and analyzing the overall performance and
behavior of an entire economy rather than individual markets or
specific economic agents.
5. Macroeconomics
examines various aggregate economic variables within a nation’s borders
●
GDP
●
Unemployment rate & wages
●
Inflation rate
●
Aggregate Supply & Demand
●
Fiscal Policy
●
Monetary Policy
●
Economic growth
●
Consumption, Investment &
Government Spending
7. Fiscal & Monetary Policy Goals
●
Both fiscal and monetary policies impact the overall economic activity.
●
Used in combination to achieve specific macroeconomic objectives.
●
Considered to be essential tools in the hands of policymakers to:
●
manage the business cycle
●
maintain economic stability.
8. Fiscal Policy
●
Fiscal policy addresses taxation and government spending.
●
Adjusting tax rates and government expenditures, fiscal policy aims to
influence aggregate demand, consumer spending, and investment
levels.
●
Addresses economic challenges, such as recession, unemployment,
and inflation.
●
Promote economic growth and stability.
9. Fiscal Policy
●
The primary goal of fiscal policy is to manage aggregate demand in the
economy, stimulate economic growth, and maintain price stability (low
inflation). It is used to address economic challenges, such as recession,
unemployment, and inflation.
●
Fiscal policy decisions are made by the government and implemented
through the formulation and execution of budgets and tax policies.
Governments can adjust tax rates, increase or decrease government
spending, and use fiscal stimulus (increasing spending or reducing taxes)
or fiscal restraint (decreasing spending or increasing taxes) as needed.
10. Fiscal Policy
●
Fiscal policy measures can take time to be implemented and may have
longer-lasting effects on the economy. Changes in government
spending and taxation require legislative approval and administrative
processes.
●
Fiscal policy directly influences the disposable income of households
and businesses. Government spending injects money into the
economy, while taxation reduces the amount of money available for
private consumption and investment.
11. Monetary Policy
●
Usually managed by the nation’s central bank.
●
Seeks to influence the money supply and interest rates in the economy
by influencing the money supply and setting interest rates.
●
Aims to regulate inflation, stabilize prices, and promote full
employment.
12. Monetary Policy
●
Monetary policy refers to the management of the money supply and
interest rates by the central bank of a country. It involves actions that
influence the availability and cost of money and credit in the economy.
●
The primary goal of monetary policy is to control inflation, stabilize
prices, and promote full employment. Central banks use monetary
policy to regulate economic growth and keep inflation within a target
range.
13. Monetary Policy
●
Monetary policy decisions are made by the central bank, which is
independent of the government in many countries. In some cases,
there may be coordination between the central bank and the
government to achieve common economic objectives.
●
Monetary policy can be implemented more quickly than fiscal policy.
Central banks can adjust interest rates or engage in open market
operations to influence the money supply and credit conditions.
14. Monetary Policy
●
Monetary policy affects the cost of borrowing, which, in turn, influences
consumer spending, business investments, and overall economic
activity.
●
Control of interest rates and money supply allows central banks
address inflationary pressures and economic growth.
15. Emerging Theories – Modern Monetary Theory
●
MMT challenges conventional notions of government spending and
fiscal policy.
●
It posits that governments that issue their own currency can never run
out of money.
●
Therefore, they can use fiscal policy more aggressively to achieve full
employment and control inflation.
Prinz, et. al. (2021)
16. Emerging Theories – Behavioral Economics
●
Integrates insights from psychology into economic analysis.
●
Recognizes that individuals are not always rational decision-makers
and can be influenced by cognitive biases and heuristics when making
choices (e.g. “satisficing”).
●
Explores how these biases affect economic decisions and how policies
can be designed to address them.
Sijabat, 2018
17. Emerging Theories – Complex Systems
●
This approach acknowledges that economies are complex adaptive
systems with interconnected elements and nonlinear relationships.
●
It explores how emergent behaviors and patterns can arise from
interactions between individual agents and how these dynamics affect
macroeconomic outcomes.
Gomes & Gubareva, 2021
18. Emerging Theories – Green Economics
●
This theory focuses on integrating environmental sustainability and
social welfare into economic decision-making.
●
It seeks to address the negative externalities of traditional economic
activities and promote environmentally friendly and socially responsible
practices.
Jacobs, 2012
19. Emerging Theories – Post-Keynesian
●
While not entirely new, Post-Keynesian economics has gained
renewed attention.
●
It retains some core Keynesian principles but also emphasizes factors
such as income distribution, financial instability, and the role of
institutions in shaping economic outcomes.
King, 2008
20. Emerging Theories – Artificial Intelligence and
Economics
●
The application of artificial intelligence and machine learning in
economic modeling and policy-making is an emerging area.
●
AI can provide new insights into complex economic phenomena and
improve the accuracy of predictions and policy recommendations.
●
●
Potential to address Simon’s computational intractability problem.
Bickley, et. al. 2022
21. Covid & Post-Covid
●
Some of the socio-economic changes the pandemic either precipitated
or accelerated may or may not become permanent.
●
Work from Home
●
“Just in time” supply chains
●
‘Clean’ energy transformation
●
Let’s consider some of the known implications in the short and long
terms.
22. Work from Home
●
Reduces commuting costs
●
More flexible lifestyle
●
Work-life balance
●
Access global workforce
●
Leaves ‘stranded’ office loans
●
Limited to ‘white collar’ jobs
●
Blurs work-life boundaries
●
Time zone differences
24. ‘Clean’ energy transformation
●
Air quality improvements
●
Renewable Energy Resilience
●
Green Recovery Stimulus
●
Remote Work and Energy
Efficiency
●
Policy Uncertainty & Faith in
Governments
●
Low Oil and Gas Prices
●
Low Oil and Gas Prices
●
Supply Chain Disruptions
25. Monetary and Fiscal Policy Post-COVID
●
In the context of monetary and fiscal policy in the future
●
Consider the implications of a cashless economy
●
Consider the implications of work from home
●
End of ‘cheap money’
26. References
●
Bickley, S.J., Chan, H.F. & Torgler, B. Artificial intelligence in the field of economics. Scientometrics 127,
2055–2084 (2022). https://doi.org/10.1007/s11192-022-04294-w
●
Gomes, O., Gubareva, M. Complex Systems in Economics and Where to Find Them. J Syst Sci Complex
34, 314–338 (2021). https://doi.org/10.1007/s11424-020-9149-1
●
Jacobs, M. “Green Growth: Economic Theory and Political Discourse” October 2012 Centre for Climate
Change Economics and Policy Working Paper No. 108 Grantham Research Institute on Climate Change an
the Environment Working Paper No. 92
●
King, J.E. (2008). Post Keynesian Economics. In: The New Palgrave Dictionary of Economics. Palgrave
Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_1634-2
●
Prinz, A.L., Beck, H. Modern Monetary Theory: A Solid Theoretical Foundation of
Economic Policy?. Atl Econ J 49, 173–186 (2021). https://doi.org/10.1007/s11293-021-09713-6
●
Sijabat, Rosdiana. (2018). Understanding Behavioral Economics: A Narrative Perspective. Asian
Development Policy Review. 6. 77-87. 10.18488/journal.107.2018.62.77.87.