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Intermediate Targets and Macroeconomic Policy

Published online by Cambridge University Press:  26 March 2020

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Extract

Throughout the 1950s and 60s the framework within which macroeconomic policy was conducted in the UK appeared to be relatively uncontentious. Government policy was designed to achieve certain economic objectives, which typically included full employment, stable prices, economic growth and balance of payments equilibrium, by appropriately setting various instruments of policy, such as tax rates and the exchange rate. The relationship between particular instruments and objectives was often disputed, and the advisability of ‘fine tuning’ was questioned, but the basic ‘instruments to objectives’ approach to policy was generally accepted.

Type
Articles
Information
National Institute Economic Review , Volume 99 , February 1982 , pp. 61 - 67
Copyright
Copyright © 1982 National Institute of Economic and Social Research

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References

(1) The argument generally abstracts from price changes, and so we do not need to distinguish between real and nominal interest rates. This point is discussed further below.

(2) William Poole, ‘Optimal choice of monetary policy instruments in a simple stochastic model’, Quarterly Journal of Economics, May 1970.

(3) For example in the context of a rational expectations model by T. J. Sargent and N. Wallace, ‘Rational expectations, the optimal monetary instrument, and the optimal money supply rule’, Journal of Political Economy, April 1975.

(1) The full effect of a change in inflationary expectations on demand will depend on a number of influences some of which could be deflationary, e.g. an ‘inflation tax’ effect on con sumption.

(2) M. Artis and D. Currie have argued that in many cases fixing the exchange rate is likely to be more effective; see, ‘Monetary targets and the exchange rate: a case for conditional targets’ Oxford Economic Papers, July 1981 Supplement.

(3) For example a sustained increase, in commodity prices would be likely to lead to higher interest rates as well as lower real balances. This would increase the government's debt interest payments, and to finance this the government would need to issue more debt. To sell this debt interest rates would have to increase still further, and the economy could enter an explosive vicious circle. This problem is considered more formally in, for example, Carl Christ, ‘On fiscal and monetary policies and the government budget restraint’, American Economic Review, September 1979.

(4) This issue is discussed by E. Gramlich and others in Brookings Papers on Economic Activity, 1979 (1).

(1) More details are contained in S. Wren-Lewis, ‘The role of money in determining prices: a reduced form approach’, Treasury Working Paper, no. 18, March 1981.

(2) K. G. P. Matthews and P. A. Ormerod, National Institute Economic Review, No. 84, May 1978. Similar problems occur in the relationship between the PSBR and £M3; see for example National Institute Economic Review, No. 94, November 1980.

(3) See for example A. P. Budd and G. Dicks, London Business School, Economic Outlook, Nov./Dec. 1981.

(4) The techniques of optimal control are designed to find the best combination of instrument values for one particular economic model. However, the problem posed here is not so much how to get the best results from one single model of the economy, but how to get things roughly right in a number of different models. The techniques of optimal control may be helpful in this task as well.

(1) The important distinction between economic indicators and intermediate targets is elaborated by B. Friedman in Brookings Economic Papers 1977 (2).

(2) Samuel Brittan, ‘How to end the ‘monetarist’ contro versy’, Hobart Paper 90.

(3) A brief outline of his proposals is contained in ‘A new financial strategy’ by Meade, Vines and Weale, Financial Times 8 December 1981. A more detailed analysis is contained in Professor Meade's recent book, Stagflation Volume I: Wage fixing, Allen and Unwin, 1982.

(4) Conditionality of this kind was attempted by the last government on occasions. It may be possible to formalise such arrangements in some form of ‘inflation tax’, but a discussion of these is outside our scope here.