Macroeconomic policy
Macroeconomic policy is concerned with the use of the instruments of fiscal policy and monetary policy to counter the destabilising effects upon the economy of an economic shock such as commodity price surge, a banking panic or the bursting of an housing price bubble. It is about decisions taken in anticipation of, or in response to, a downturn in economic activity, and it is also about decisions concerning the fiscal consolidation measures needed to correct an increase in the budget deficit resulting from such a downturn. The decisions required in both cases concern the selection of instruments and the determination of the magnitude and timing of their application.
Overview
The major influence upon macroeconomic policy is the understanding of the workings of the economic system that has been brought about by the study of macroeconomics, but its conduct tends also to be influenced by political ideologies, by attitudes to public debt, and by reflexive and analytical responses to the outcomes of previous policy applications.
Historical background
Recessions and lesser fluctuations have punctuated the growth of the major economies from time to time since the 18th century. There was no policy response to any of the recessions of the 19th century or before. The prevailing attitude to recessions in the 1920s was the teaching of the Austrian School led by Friedrich Hayek in London, and supported by eminent American economists. It was held that to stimulate consumption through inflationary policies would perpetuate artificial demand and delay any real cure. Harvard's Joseph Schumpeter argued that there was: :" a presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future;" - and that "depressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change."[1]. That was the view of United States Secretary of the Treasury, Andrew Mellon, (who has been quoted as advising President Hoover that the depression would "purge the rottenness out of the system") and it was shared by Britain's Chancellor Phillip Snowden.[2] They agreed that expansionary monetary and fiscal policies should be avoided because they would reduce investor confidence and hinder the resumption of private investment.