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This chapter examines the effect of the cyclical pattern of fiscal and monetary policies on economic growth. Economists generally see no connection between the way stabilization policies are implemented and the average speed at which the affected economy grows. If anything, growth theories tend to highlight the importance of stable and consistent policies as exemplified by recommendations to run prudent fiscal and monetary policies through balanced fiscal accounts or moderate inflation. Yet the view that policy recommendations to foster long-term growth should stop at calls for prudent fiscal and monetary policies has recently been challenged. Drawing on cross-industry, cross-country panel data regressions, this chapter explores the effect of fiscal policy countercyclicality and monetary policy countercyclicality. It shows that industries with greater financial constraints tend to grow faster in countries with more stabilizing fiscal or monetary policies.

This chapter examines the relationship between accountability and credibility and discusses factors that might affect this trade-off. It also examines how transparency-enhancing measures interact with accountability and credibility, how they alter the trade-off between those two attributes, and the implications for the institutional structure of the European Central Bank (ECB). It then asks whether it is a good idea to publish central bank forecasts about the economy as soon as they are formed. This question is examined in the presence of a neo-Keynesian transmission mechanism in which the ex ante real rate affects the output gap and the latter affects subsequent inflation. Here, the objectives of society include, in addition to price stability and stabilization policy, interest rate smoothing.

When food prices spike in countries with large numbers of poor people, hunger and malnutrition are very likely to result in the absence of public intervention. Government actions often take the form of direct interventions in the market to stabilize food prices, which goes against most international advice to rely on safety nets and world trade. Despite the limitations of food price stabilization policies, they are widespread in developing countries. Price stabilization policies arise as a result of international and domestic coordination problems. At the individual country level, it is in the national interest of many countries to adjust trade policies to take advantage of the world market in order to achieve domestic price stability. When countercyclical trade policies become widespread, the result is a thinner and less reliable world market, which further decreases the appeal of laissez-faire. A similar vicious circle operates in the domestic market: without effective policies to protect the poor, food market liberalization lacks credibility and makes private actors reluctant to intervene, which forces government to act. The current policy challenge lies in designing policies that will build trust in world markets and increase trust between public and private agents.

The imbalance in massive foreign currency reserves held by East Asian countries combined with a record US current account deficit has the potential to throw the global economy into financial turmoil or recession. Different views on this imbalance are explored, along with policy options and intra-regional cooperation.

The IMF programs failed to take into account possible conflicts between different reform measures and objectives such as the conflicts between stabilization policies and structural reforms, and between operational restructuring and institutional reform. Corporate restructuring was not treated as an integral part of financial restructuring, resulting in moral hazard problems.

Following the success of the hydraulic machine, Phillips undertook a doctorate at LSE. He started to earn money, building a reputation. In 1954 he married and subsequently had two daughters. He now focused on a related problem: how to stabilize a volatile economy. Bill built several mathematical models to represent the problem, among the first to apply the engineering principles of optimal control to economics. But he discovered that if they were to be calculable, the models had to be unrealistically simple. These were the pioneering days of early computing. Phillips eventually managed to build a more realistic model of the economy, and to test it on early analogue and digital electronic computers, among the first economists to do so. These papers remain among Phillips’ most important publications, and established him as a world class economist. By the end of the decade he had been appointed to LSE’s senior professorship.

This chapter looks at how the new policy focus on advanced manufacturing developed following the Great Recession. Barack Obama faced the Great Recession with a 10 percent unemployment rate. In particular, the auto industry had collapsed, smashing a large part of the manufacturing supplier sector. Government efforts to return to tolerable growth levels were relying almost exclusively on short-term stabilization policies. Neoclassical economists were at the helm, pressing their menu of fiscal and monetary plans to coax the price signals that could restore investment to nurture positive rates of growth. The problem was that these stabilization policies were limited in their ability to offset long-term underinvestment in the economic assets and factors that create the larger growth multipliers needed. For a significant period, this longer-term underinvestment had led to declining U.S. competitiveness and slower rates of growth. In other words, short-term stabilization was simply not enough; the problems were deeply structural and required a structural response.

the chapter assesses the contributions of Roberto Frenkel to the economic analysis of Latin America since the mid-1970s, on issues such as inflation and high inflation, stabilization policies, balance of payments and financial crises, and the crucial role of real exchange rates in developing economies. The authors highlights the relevance of many of Frenkel’s findings for the analysis of current economic problems and then, having those findings in mind, discuss some key features of Argentina’s economic evolution throughout the last decade.

The chapter discusses the future of rules-based fiscal policy, with a focus on fiscal rules in the European Union (EU). It argues that the European fiscal stance was at times too restrictive during the crisis, due to the incompleteness of the architecture of the European Monetary Union rather than its fiscal framework. The chapter also argues that fiscal rules need to achieve a double act: anchor public debt ratios while helping to stabilize the economy. Both goals are consistent with the present EU fiscal rules but are hidden in a framework that is overly complicated.

This chapter briefly revisits the book’s discussions of Keynes, the Great Depresssion, and Stabilization policies. It considers the importance of fiscal policy and the importance of simplicity in its use and the trust in its impact, especially in the 1960s. The chapter then looks at stagflation and growing doubts in the 1970s and the growing importance of rational expectations and of the Ricardian Equivalence Hypothesis and their impact on stabilization policy. Monetary policy also took on increasing importance in light of the growing complexity of the structure of the economy and the consequent growth of many new occupations. Finally, the impact of these changes and of growing globalization on the design of stabilization policies is discussed alongside a possible reduction in the effectiveness of fiscal policy.

The Indian government runs a massive program of buying food from the open market to maintain a buffer stock for times of shortage or high food inflation, and also to distribute subsidized food grain to poor households. This large operation is described and its efficiency scrutinized as a prelude to a discussion of how to improve this system of providing welfare benefits to the poor.