Is Macroeconomic Dead? Monetary and Fiscal Policy in Historical Context

Abstract

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 This has now, in turn, been replaced by a variation on the classical theme.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.