Fiscal-Monetary Activism: Some Analytical Issues

Abstract

IN RECENT YEARS, ECONOMISTS have intensely debated the appropriate degree of activism in fiscal-monetary policy making.The "new economics" of the 1960s emphasized activism, particularly in fiscal policy, relying "less on the automatic stabilizers and more on discretionary action responding to observed and forecast changes in the economy-less on rules and more on men."lWhen the economy's performance deteriorated after 1965, the activism of the policy strategy came under attack.In particular, the dissatisfaction led to a renewed espousal of rules for policy such as had long been advocated by Milton Friedman for monetary policy and by Herbert Stein for fiscal policy.2The critics of activism argue that changes in fiscal and monetary instruments designed to narrow deviations of the economy from a target path are likely to widen them instead, whereas the maintenance of appropriate fixed instrument settings would achieve greater economic stability.Specifically, the critics question the contribution of fiscal activism to the success story of the early sixties and emphasize that economic performance was * I am indebted to