[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 33
THE ROLE OF
MACROECONOMIC
POLICY
∂
Economic policy debates have always been at the core of macroeconomics.
After all, macroeconomics began as an attempt to understand the causes
of the Great Depression of the 1930s and to formulate government policies
that might end it. Discussions in the United States in recent years have been dominated
by the debate over job creation after the 2001 recession, the huge federal government
deficits and their possible impact on economic growth, and the implications
of the trade deficit.
Economies are constantly buffeted by shocks and disturbances—the stock market
collapse in 2000; the financial crises in Asia, Europe, and Latin America in the late
1990s; large swings in the federal budget deficit; new technological innovations transforming
many sectors of the economy—that have the potential to create recessions
or ignite inflation. In the face of these disturbances, policymakers must try to ensure
that the economy continues to operate at potential GDP while inflation remains low
and stable.
In this chapter, we will examine the role of both monetary and fiscal policy in
affecting the economy in the short run. Chapters 29 to 31 have provided a framework
for understanding the impact of government on the economy. In those chapters,
the analysis treated policy in isolation—explaining how a change in fiscal
or monetary policy affected the economy. But macroeconomic policy decisions
are not taken in isolation—governments use monetary and fiscal policy to try to
stabilize the economy, and this role of macroeconomic policy is the topic of the
present chapter.
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