Stabilization Policy Ten Years After

Abstract

WHEN the Brookings panel first met ten years ago, the U.S. governments managers of aggregate demand were cooling an economy suffering from an inflation 4 points higher than ten years before. The unemployment rate was 4.5 percent. Four years later, at the time of the panel's thirteenth meeting, the demand managers were cooling an economy suffering from an inflation 6 points higher still. The unemployment rate was 5 percent. As the panel meets today, the government's managers of aggregate demand are cooling an economy suffering from an inflation 7 points higher than ten years before. The unemployment rate is 7 percent and rising. Higher inflation, higher unemployment-the relentless combination frustrated policymakers, forecasters, and theorists throughout tLhe decade. The disarray in diagnosing stagflation and prescribing a cure makes any appraisal of the theory and practice of macroeconomic stabilization as of 1980 a foolhardy venture. The patent breakdown of consensus spares me the task of seeking and describing collective views. I will just give my own observations and confess my own puzzlements. In one respect demand-management policies worked as intended in the 1970s. On each of the occasions I described at the beginning, the man-I am grateful to my colleagues at Yale and to members of the Brookings panel for comments on the original version, to Ray C. Fair also for the use of his model reported in the paper, and especially to members of the panel for many discussions of substance and for painstaking guidance of the revision. Bret Bertolin and Kathleen K. Donahoo provided efficient statistical and editorial assistance. Laura Harrison and other Cowles Foundation staff miraculously produced the typescripts under deadline pressures of my own making. The work was in part supported by the National Science Foundation and the Cowles Foundation.

Nominal GDP Targeting for Developing Countries

“…3 But it has been focused on advanced economies such as the US, UK, Japan and Euroland, where interest rates have been constrained by the "zero lower bound." The motive for NGDP targeting in this literature is to achieve a credible monetary expansion and higher inflation rates, which are quite the opposite of the context that Meade (1978) and Tobin (1980) had in mind. This flexibility of NGDP targeting, as a practical way to achieve the goal of the day, be it monetary easing or tightening, and its focus on stabilizing demand are longstanding advantages.…”

Inflation Targeting, Employment Creation and Economic Development: Assessing the Impacts and Policy Alternatives

“…First, they do not simulate the impact of inflation targeting relative to other possible policy regimes, such as the real targeting regime discussed below. Second, the model is based on estimates of potential output that are themselves affected by monetary policy (se, e.g., Tobin, 1980;Michl, 2007). Hence, if monetary policy slows economic growth, it also lowers the rate of growth of potential output and, therefore reduces the gap between the two, thereby appearing to stabilize the economy.…”

The Monetary Policy Debate Since October 1979: Lessons for Theory and Practice

“…James Tobin's (1980) comprehensive review of stabilization policy written for the 10th anniversary of the Brookings Papers on Economic Activity contains a good summary of macroeconomic theory as it related to monetary policy, unemployment, and inflation at the time. The five main points of what he calls the consensus macroeconomic framework, vintage 1970, are as follows 4 :…”