The Limits to Macroeconomic Policy
A country’s economy represents an equilibrium driven by the vast workings of many moving parts. Some of these parts include governments, policy makers, trade partners, international investors and banking authorities. Today’s technological advancements have made it easier than ever for monies to traverse national borders quickly and efficiently. This capability facilitates inflows and outflows of capital in response to signals. Not all of these signals are economic yet the effects can have a devastating impact.
Economic crisis has precipitated many changes throughout the course of history. Whether it is the great depression of the 1930’s, the Latin Debt crisis in the early 1980’s or more recently the financial collapse of the U.S. housing market in 2007, crisis precipitates change. Changes within macroeconomic policies surrounding monetary, fiscal or political programs are adjusted to reverse negative trends and sustain long term positive growth. There is a sort of yin and yang balance to economic policies evolves and cycles through a continuum of consumption and conservation (Cervone & Shoda, 1999).
A country attempts to optimize the balance of consumption and conservation, in order to maximize productive economic growth. The primary drivers used to change economic outcomes are fiscal and monetary policies. These policies are adjusted based on trends associated with consumption and conservation patterns. Policy makers, whether government or independent (e.g. Central Banking Authorities such as the Federal Reserve), evaluate risk factors associated with these trends, in conjunction with historical events, in order to prevent negative economic outcomes. These idiosyncratic and systematic risk factors are mitigated through policies. Idiosyncratic factors are more easily adjusted for. Systematic risks are difficult to predict and not easily corrected.
Monetary and fiscal policies can be altered independently and/or together. Typically, one is adjusted depending on the trend identified however when the recovery remains anemic a synergistic change in the complementary policy may be required to move toward positive outcomes. An example: The Fed cuts interest rates to reverse an economic downturn. If this downturn is deep and the interest rate adjustment does not reverse the negative trend, then a correction to the fiscal policy may be warranted. This is because the monetary policy runs out of ammunition, requiring complementary support from the fiscal policy. In this case, a tax cut from Congress can help raise aggregate demand for goods and services. Using a tax cut in addition to lowering interest rates places more money with the individual, making capital investment and consumption opportunities more attractive.
Case Study Highlights
This case study utilized Argentina’s challenges in the 1980’s as the foundation for evaluating how economic policies require change over time. ...