Economic policy
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201001555
2008-03-26T06:19:38Z
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{{Unreferenced|date=December 2007}}
{{distinguish|Political economy}}
{{Public finance}}
'''Economic policy''' refers to the actions that [[government]]s take in the [[economics|economic field]]. It covers the systems for setting [[interest rate]]s and [[government deficit]] as well as the [[labour market]], [[nationalization|national ownership]], and many other areas of government.
Such policies are often influenced by international institutions like the [[International Monetary Fund]] or [[World Bank]] as well as [[political]] beliefs and the consequent [[policy|policies]] of [[political parties|parties]].
==Types of economic policy==
Economic policy is a complicated area and can be broken down into three principal areas:
*[[Fiscal policy]] is the size of the government [[deficit]] and the methods it uses to finance it.
**[[Fiscal stance]]: The size of the deficit
**[[Tax|Tax policy]]: The taxes used to collect government income.
**[[Government spending]] on just about any area of government
*[[Monetary policy]] is concerned with the amount of [[money]] in circulation and, consequently, [[interest rate]]s and [[inflation]].
**[[Interest rate]]s, if set by the Government
**[[Incomes policies]] which aim at imposing non-monetary controls on inflation
**[[Bank regulation]]s which affect the [[money multiplier]]
*[[Trade|Trade policy]] refers to [[tariffs]], [[trade agreement]]s and the international institutions that govern them.
Almost any aspect of government has an economic aspect and so many terms are used. However, they can usually be seen to apply to one of these areas. For instance, [[agricultural policy]] is generally a matter of the [[burden of taxation]] and of trade in agricultural goods.
==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, [[labour market]] regulations, and many other aspects of government.
The government's economic policy determines the tools and hopes that they will achieve its goals.
===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 microeconomic, [[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 policy|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 rule]]s.
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 rate]]s, [[interest rate rule]]s, the [[stability and growth pact]] and the [[Golden Rule (fiscal policy)|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 Australia]] all 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==
{{main|Economic history}}
The first economic problem was how to gain the [[Resource (economics)|resources]] it needed to be able to perform the functions of an early government: the [[military]], [[road]]s and other projects like building the [[Pyramids]].
Early governments generally relied on [[tax]] in kind and [[forced labour]] 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 [[coin|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 as [[Ptolemaic 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 [[mercantilism]] and 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 [[deficit]]s 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 [[Bond (finance)|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 [[economic cycle|cyclical]] manner. The first real policy solution 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.
==See also==
*[[Stabilization policy]]
[[Category:Macroeconomics]]
[[Category:Economic policy]]
[[bs:Ekonomska politika]]
[[de:Wirtschaftspolitik]]
[[et:Majanduspoliitika]]
[[es:Política económica]]
[[fr:Politique économique]]
[[hr:Ekonomska politika]]
[[it:Politica economica]]
[[lt:Ekonominė politika]]
[[ja:経済政策]]
[[pl:Polityka gospodarcza]]
[[pt:Política econômica]]
[[ro:Politică economică]]
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