Economic Policy,MacRoeconomics

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1 2 3 4 5  Email this Article ECONOMIC POLICY Article Id: WHEBN0000210522 Reproduction Date: Title: Economic policy    Author: World Heritage Encyclopedia Language: English Subject: Margarita Starkevičiūtė,Political economy, Center for Economic and Policy Research, Criticisms of econometrics, Income distribution Collection: Economic Policy,MacRoeconomics Publisher: World Heritage Encyclopedia Publication Date: ECONOMIC POLICY Public finance Policies Agricultural    Economic    Energy    Industrial  Investement    Social    Trade    Fiscal    Monetary  Policy mix Fiscal policy Budget   policy      Debt   external    internal    Deficit / Surplus    Finance ministry    Fiscal union  Revenue    Spending   deficit      Tax Monetary policy Bank reserves (requirements)   Discount window    Gold reserves  Interest rate    Monetary authority  central bank    currency board  Monetary base    Monetary (currency) union  Money supply Trade policy Balance of trade    Free trade    Gains from trade  Non-tariff barrier    Protectionism    Tariff  Trade bloc    Trade creation    Trade diversion  Trade / Commerce ministry Revenue    Spending Non-tax revenue    Tax revenue  Discretionary spending    Mandatory spending Optimum Balanced budget (fiscal)  Growth (trade and investment)  Price stability (monetary) Reform Fiscal adjustment    Monetary reform Economic policy refers to the actions that governments take in theeconomic field. It covers the systems for setting levels of taxation,government budgets, the money supply and interest rates as well as the labor market, national ownership, and many other areas of government interventions into the economy. Most factors of economic policy can be divided into either fiscal policy, which deals with government actions regarding taxation and spending, or monetary policy, which deals with central banking actions regarding the money supply and interest rates. Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as politicalbeliefs and the consequent policies of parties. CONTENTS Types of economic policy 1 Macroeconomic stabilization policy 2 Tools and goals 3 Selecting tools and goals 3.1 Demand-side vs. supply-side tools 3.2 Discretionary policy vs policy rules 4 Economic policy through history 5 The first fiscal policy 5.1 Business cycles 5.2 See also 6 References 7 TYPES OF ECONOMIC POLICY Almost every aspect of government has an important economic component. A few examples of the kinds of economic policies that exist include:[1] Macroeconomic stabilization policy, which attempts to keep themoney supply growing at a rate that does not result in excessive inflation, and attempts to smooth out the business cycle. Trade policy, which refers to tariffs, trade agreements and the international institutions that govern them. Policies designed to create economic growth Policies related to development economics Policies dealing with the redistribution of income, property and/or wealth As well as: regulatory policy, anti-trust policy, industrial policy and technology-based economic development policy MACROECONOMIC STABILIZATION POLICY Stabilization policy attempts to stimulate an economy out of recession or constrain the money supply to prevent excessive inflation. Fiscal policy, often tied to Keynesian economics, uses government spending and taxes to guide the economy. Fiscal stance: The size of the deficit or surplus Tax policy: The taxes used to collect government income. Government spending on just about any area of government Monetary policy controls the value of currency by lowering the supply of money to control inflation and raising it to stimulate economic growth. It is concerned with the amount of money in circulation and, consequently, interest rates andinflation. Interest rates, if set by the Government Incomes policies and price controls that aim at imposing non-monetary controls on inflation Reserve requirements which affect the money multiplier TOOLS AND GOALS Policy is generally directed to achieve particular objectives, like targets for inflation, unemployment, or economic growth. Sometimes other objectives, like military spending or nationalization are important. These are referred to as the policy goals: the outcomes which the economic policy aims to achieve. To achieve these goals, governments use policy tools which are under the control of the government. These generally include the interest rate and money supply, tax and government spending, tariffs, exchange rates, labor marketregulations, and many other aspects of government. SELECTING TOOLS AND GOALS Government and central banks are limited in the number of goals they can achieve in the short term. For instance, there may be pressure on the government to reduce inflation, reduce unemployment, and reduce interest rates while maintaining currency stability. If all of these are selected as goals for the short term, then policy is likely to be incoherent, because a normal consequence of reducing inflation and maintaining currency stability is increasing unemployment and increasing interest rates. DEMAND-SIDE VS. SUPPLY-SIDE TOOLS This dilemma can in part be resolved by using microeconomics, supply-side policy to help adjust markets. For instance, unemployment could potentially be reduced by altering laws relating to trade unions or unemployment insurance, as well as by macroeconomic (demand-side) factors like interest rates. DISCRETIONARY POLICY VS POLICY RULES For much of the 20th century, governments adopted discretionary policies like demand management designed to correct the business cycle. These typically used fiscal and monetary policy to adjust inflation, output and unemployment. However, following the stagflation of the 1970s, policymakers began to be attracted to policy rules. A discretionary policy is supported because it allows policymakers to respond quickly to events. However, discretionary policy can be subject to dynamic inconsistency: a government may say it intends to raise interest rates indefinitely to bring inflation under control, but then relax its stance later. This makes policy non-credible and ultimately ineffective. A rule-based policy can be more credible, because it is more transparent and easier to anticipate. Examples of rule-based policies are fixed exchange rates, interest rate rules, the stability and growth pact and the Golden Rule. Some policy rules can be imposed by external bodies, for instance the Exchange Rate Mechanism for currency. A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body. For instance, the Federal Reserve Bank, European Central Bank, Bank of England and Reserve Bank of Australiaall set interest rates without government interference, but do not adopt rules. Another type of non-discretionary policy is a set of policies which are imposed by an international body. This can occur (for example) as a result of intervention by the International Monetary Fund. ECONOMIC POLICY THROUGH HISTORY The first economic problem was how to gain the resources it needed to be able to perform the functions of an early government: the military, roads and other projects like building the Pyramids. Early governments generally relied on tax in kind and forced labor for their economic resources. However, with the development of money came the first policy choice. A government could raise money through taxing its citizens. However, it could now also debase the coinage and so increase the money supply. Early civilizations also made decisions about whether to permit and how to tax trade. Some early civilizations, such asPtolemaic Egypt adopted a closed currency policy whereby foreign merchants had to exchange their coin for local money. This effectively levied a very high tariff on foreign trade. By the early modern age, more policy choices had been developed. There was considerable debate about mercantilismand other restrictive trade practices like the Navigation Acts, as trade policy became associated with both national wealth and with foreign and colonial policy. Throughout the 19th Century, monetary standards became an important issue. Gold and silver were in supply in different proportions. Which metal was adopted influenced the wealth of different groups in society. THE FIRST FISCAL POLICY With the accumulation of private capital in the Renaissance, states developed methods of financing deficits without debasing their coin. The development of capital markets meant that a government could borrow money to finance war or expansion while causing less economic hardship. This was the beginning of modern fiscal policy. The same markets made it easy for private entities to raise bonds or sell shares to fund private initiatives. BUSINESS CYCLES The business cycle became a predominant issue in the 19th century, as it became clear that industrial output, employment, and profit behaved in a cyclical manner. One of the first proposed policy solutions to the problem came with the work of Keynes, who proposed that fiscal policy could be used actively to ward off depressions, recessions and slumps. The Austrian School of economics argues that central banks create the business cycle. SEE ALSO Stabilization policy Budget process Constitutional economics Notes Public policy Fields Agricultural    Commercial    Cultural    Domestic    Drug   reform    Economic   Fiscal    Incomes    Industrial    Investment    Monetary    Tax      Education  Energy   Nuclear energy    Renewable energy      Environmental    Food    Foreign  Health   Pharmaceutical    Vaccination      Housing    Immigration    Knowledge    Language    Military  Science   Climate change    Stem cell    Space    Technology      Social Other topics Public policy doctrine    Public policy school    Policy analysis    Policy studies    Regulation  Public policy by country HELP IMPROVE THIS ARTICLE Sourced from World Heritage Encyclopedia™ licensed under CC BY-SA 3.0 Help to improve this article, make contributions at the Citational Source This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. 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