Journal Article

Is Macroeconomics Dead? Monetary and Fiscal Policy in Historical Context

Ross Garnaut

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 21, issue 4, pages 524-531
Published in print January 2005 | ISSN: 0266-903X
Published online January 2005 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/gri030
Is Macroeconomics Dead? Monetary and Fiscal Policy in Historical Context

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There was no macroeconomic policy in the classical system of economic thought. Monetary policy was determined without discretion within the Gold Standard, and budget outcomes were guided by a ‘balanced budget rule’. Intellectual and policy support for the classical rules evaporated when large shocks upset the classical adjustment mechanisms and led to high and persistent unemployment. For a number of decades after Keynes's general theory, discretionary adjustment of fiscal and monetary policy to maintain balance between supply capacity of the economy and demand replaced the classical rules. This has now, in turn, been replaced by a variation on the classical theme. A ‘goods and services standard’, designed to keep inflation steady and low, a freely floating exchange rate, and a ‘small, steady budget surplus’ are the elements of the new system in Australia. This has worked well enough in the particular circumstances of the past one and a half decades, but would be vulnerable to a reversal of recent Australian good fortune in its terms of trade.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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