How macroeconomists lost control of stabilization policy: towards dark ages

Abstract

This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilization policy from 1948 to 1975 and the subsequent break of the use of control for stabilization policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favored their support of rules against discretionary stabilization policy. The Lucas critique and Kydland and Prescott's time-inconsistency were overstatements that led to the "dark ages" of the prevalence of the stabilizationpolicy-ineffectiveness idea. These overstatements were later revised following the success of the Taylor (1993) rule.

New challenges for fiscal policy in Central and Eastern Europe

“…The intellectual breakthrough of the post oil-shock 1970s period consistently shaped the conduct of the policy mix (see, for example, Kydland & Prescott., 1977;Sargent & Wallace, 1981;Chatelain & Ralf, 2020, for a historical perspective). This was the case particularly regarding the architecture of the European Union/Eurozone, where a supranational politically-independent central bank is combined with fiscal criteria that impose upper bounds on fiscal aggregates, such as a deficit and a public debt ratio below 3% and 60% of GDP, respectively.…”

Imperfect Credibility Versus No Credibility of Optimal Monetary Policy

“…There is a long history of different definitions of "discretion" for stabilization policy (Chatelain and Ralf [2020a]). Clarida, Gali and Gertler [1999] and Gali ([2015], chapter 5) define "discretion" (or discretion equilibrium) as the case where policy makers reoptimize with certainty each period.…”