Policy commitment and policy discretion – Summary


The contents


Introduction
………………………………………………………………………
………………. 2


1.
Policy “hard
of course”……………………………………………………………..
3


2.
the policy of “freedom of action”………………………………………………………
5


3.
The choice between a policy of “solid course”


and
the policy of “freedom of action”…………………………………………………….6


4.
THE CONTRADICTORY GOALS OF MACROECONOMIC
REGULATION


And
THE PROBLEM OF COORDINATION OF COURSES
FISCAL


And
MONETARY ……………………………………………………….
9


CONCLUSION
……………………………………………………………………………………….
14


LIST
LITERATURE…………………………………………………………………………….
15


INTRODUCTION



Beginning my work, I wanted
to explain what is politics
“fixed rate” policy and “freedom
action.”



The policy of “tough course”
suggests that the government or
The Central Bank in one way or another
the economic situation take action
in the framework of pre-defined rules
game.



The policy of “freedom of action” –
in another way, it is called discretionary
policy. This policy entails
the choice of macroeconomic policy,
depending on the assessment arose
economic problems with regard
for this specific case.



The policy of “fixed rate” or
discretionary policy – what to choose?
What policy is most effective?
The experience of macroeconomic regulation
in industrial countries shows,
that “play” has a distinct
advantages over arbitrary
policy. Solid courses policy
government and Central Bank
allow regarding fencing
the economy from the impact of changes
the political situation. Commitment
hard course reduces the possibility
fiscal and monetary maneuvers in
the short term, but contributes to
the stabilization of the economy in the long
plan. The policy of a fixed rate, which
is not accompanied by any promises
makes economic agents more
trust, making expectations more
rational and creates overall more
favourable environment from the point of view
long-term goals of economic
growth.



In this work, will be considered:
the policy of “fixed rate” and
the policy of “freedom of action”, the problem
the choice between these two models and
the contradictory goals of macroeconomic
regulation and the problem of coordination
courses fiscal and monetary
policy.



1.The policy of “tough course”



The choice between active and passive
models of macroeconomic policy
not identical to the choice between “policy
fixed rate” and “freedom of action”.
Consistent macroeconomic
policy (“policy commitment”
or “playing the game”) involves
early selection of measures
can be taken in one way or another
situation and which predetermine
practical steps of the government and
Central (National) Bank.
“Commitment” means measures
governments and Central
(National) Bank change
public expenditure, taxes and
the money supply is limited
the quantitative part of the elect
targets that cannot
to be changed in accordance with the current
our economic situation. So
freedom of action of the government and
The Central Bank is
limited compliance to
pre-announced rules of the game.



An example of passive macroeconomic
policy under commitment to
the stabilization of the growth rate of the money supply
is the increase in money supply
3% per year, regardless of level dynamics
unemployment and other factors.



An example of the active policy
the framework of the mentioned rate of the Central
the Bank may be the following equation1:



,



where

the growth rate of the money supply.




the actual
the unemployment rate in the current and the past
year (respectively).



In both cases, a solid course
The Central Bank is, in terms of
the is–LM model, shift the LM curve to the right, so
as the Central Bank aims
stabilized with extensions
money supply in
the decline in the economy. But the magnitude of this
shift the LM curve to the right with passive
politics is always the same, and with the active
– increase according to the depth
recession.



2. The policy of “freedom of action”



Inconsistent macroeconomic
policy (the policy of “freedom of action”
or “freedom of initiative”) means that
the government and the Central Bank give
assessment of the economic problems in each
particular case, as they arise,
and, at every moment of discretionary
select the appropriate type of policy.
Therefore, this policy is also called
discretionary, although in this case
the contents of this term much more
than in the context of discretionary
fiscal policy. “Freedom of action”
means the absence of any
quantitative framework that restricts
the ability of the government and the Central
Bank on change of state
expenses, taxes and money supply.



The policy of freedom of action
means the choice of macroeconomic
policy depending on the evaluation
the arisen economic problems
with regard to this specific
case.



3. The choice between a policy of “hard
of course” politics “freedom of action”



Experience macroeconomic
regulation in industrial countries
suggests that “playing by the rules”
has many advantages over
arbitrary policy. These benefits
in its most General form, can be reduced
to three circumstances:




  1. Consistent macroeconomic
    the policy reduces the risk of making
    incompetent decisions. Incompetence
    in economic policy can be
    is not so much the incompetence
    specific officials, how many:




First, incompetent
the decision of the government may occur
spontaneously, as a result of the collision
conflicting interests of different
social groups;



Second, the imperfection of
information is “nourishing
the soil” for the actions of Amateurs,
offering tempting, but unrealistic
programs quick resolution of complex
macroeconomic problems. When solid
course of government policy and
The Central Bank reduced risks
making incompetent decisions under
the pressure of certain social
groups or “popular” programs.



2) Policy of a fixed rate reduces
the impact of the political business cycle
on the dynamics of the employment levels of volume
output and inflation. Politicians
implementing the measures of fiscal and
monetary policy trying to make
so that by the time the elections happened
beneficial in a social sense
the conditions that would ensure the re-election
the leaders of this party to the next
time. For these purposes, you can first
to stimulate the increase of employment,
and then inflation as the result
more stringent expense policies that
ensure the time of re-election
relatively high employment in
relatively moderate inflation. This
the same result can be achieved using
the opposite combination –
first carry out a tough anti-inflationary
policy, combined with an increase
unemployment, and then stimulating
a policy of increasing employment and
income. Thus, the maneuvering
levels of employment and inflation is
aimed not so much at ensuring
sustainable economic growth,
how to ensure political
victory at the next election. In the end
the political process itself
becoming one of the factors
cyclical fluctuations in the economy.



Solid courses of government policy
and the Central Bank allow
regarding to shield the economy from
the impact of changes in political
situation. Commitment to strong
rate reduces the possibility of fiscal
and monetary maneuvers in the short
period, but contributes to the stabilization
the economy in the long term.



3) “playing the Game” promotes
confidence-building economic
agents to the policy of the government and
Of the Central Bank. The problem of mistrust
is not so much the distrust
individual officials, how much
with possible failures of the government and
The Central Bank on its promises
to conduct certain economic
measures. For example, when arbitrary
macroeconomic policy of the government
may announce preferential taxation
profits from investments to attract
the capital in certain industries and regions.
But when capital has already been invested,
the government may abandon its
promises to reduce taxation,
since this poses a threat increase
the state budget deficit. Another example:
promote innovation
the government gives inventors
new products patents
granting them a monopoly
use it for a number of years and
obtaining monopoly profits. But after
how inventions already made,
the government may cancel
patents, to make products more
available to the consumer.



In each of these cases
economic agents know that
the government may violate its
promises. So they are insured against
“cheating” – do not invest and do not
inventions. As a result of such
inconsistent government policies
the economy as a whole loses,
as the incentives to economic growth
is blocked
pessimistic expectations.



The policy of a fixed rate, which
is not accompanied by any promises
makes economic agents more
trust, making expectations more
rational and creates overall more
favourable environment from the point of view
long-term goals of economic
growth.



3. The contradictory goals
macroeconomic regulation and
the problem of coordination of courses
fiscal



and monetary policy



Possible “hard courses”
fiscal policy of the government
may include:



a) the state budget, which
is balanced annually;



b) state budget,
being balanced in over a long period
on cyclic and functional basis.



The government’s commitment to annually
balanced state budget:



– reduces the degree
“built-in” stability of the economy;



– causes frequent fluctuations
tax rates that reduce
investment activity;



– relatively reduces
income the present generation in favor
future.



As the course annually
a balanced budget is associated with
significant costs, to the extent
the budgets of most countries are balanced
in the longer term. When
as targets
fiscal policy, limiting
the freedom of action of governments and
guides her to maintain
certain quantitative ratios
there may be:



reducing the overall volume
public debt;



– stabilizing
debt/GDP;



– alignment growth
public spending and growth
GDP;



– equal or exceeding
net investments net
the amount of public debt.



These targets
restrain the “appetite” of departments
consuming the state budget,
who are forced to confront your
the requirements of the new budget resources
these restrictions. Without such
limits the rate of actual
the state budget deficit
it may be difficult to manage.



Possible “hard courses”
monetary policy of the Central
the Bank includes:



a) maintaining a steady pace
changes in the money supply;



b) the stabilization of the market rate
percent;



C) stabilization of the nominal
GNP.



With the stabilization of the rate of change
the money supply, the Central Bank sets
every year a certain level
growth and through transactions in the open
market, discount policy or the change
reserve requirements supports
a stable money supply. When
such a policy is curve LM has a positive
tilt: as the money supply
consistently, a higher level
the release corresponds to a higher
the rate of interest. This course is Central
(national) Bank is
effective when relatively stable
the velocity of money.



The stabilization of interest
bets the Central Bank changes
money supply by using the
tools so that
actual market average rate
percent closer to the chosen
the target reference point. This course allows
relatively to reduce the crowding out effect
private investment that accompanies
stimulating fiscal policy. In
the same time, the stabilization of interest rates
allows you to relatively stabilize
dynamics of the exchange rate, as, when
other things being equal, between
variables there is a positive
a functional dependence.



The stabilization of interest rates
graphically can be depicted in the form of
horizontal LM curve, “fixed”
at the level of the benchmark.



If the government and the Central
the Bank successfully coordinate their actions,
the stabilization of interest rates may
to be achieved by the traditional
the slopes of the curves IS and LM, and their coordinated
shifts.



The anti-inflationary potential
of course on the stabilization of the rate of change
the money supply is higher than the rate
on the stabilization of market interest rate,
however, in the first case it is not possible
to avoid the crowding-out effect.



The policy of stabilizing the nominal
GNP has the greatest anti-inflationary
potential, although practical implementation
this policy is complicated by the fact that GNP
varies over a considerable time
lag to any action. This course assumes
“fixation” vertical LM curve at
the level of the chosen reference point.



If the actual nominal
GNP is higher than specified, then
The Central Bank through measures
monetary policy reduces
the money supply that is accompanied by
employment and output
products. If the actual GNP is below
a predetermined level, the Central Bank
conducts monetary expansion.
Fluctuations in the level of employment at such
the policy can be significant,
although over a long period of stabilization
the issue involves the stabilization
the level of unemployment.



“Straightening” of the curve LM, as
implies a coordinated
the actions of the Central Bank and
the government, as the LM curve becomes
vertical at very high rates
percent, accompanied by
to minimize the speculative demand for
money and saving is essentially only
transaction demand for money. This
a significant increase in interest
rates can be achieved with debt
the financing of the budget deficit in
combined with a restrictive
the monetary policy of the Central
Bank.



Describes the course of state
policy is most effective
in situations when lower level
inflation becomes a priority
the goal of macroeconomic regulation.



The experience of many countries shows,
what credible policy
The Central Bank, which provides
a low, stable rate of money growth
mass. However, such a policy is incompatible
with the fiscal policy of the government,
focused on a significant deficit
budget. This incompatibility
due to a disability
debt financing budget
deficit and the inevitable increased
inflationary pressure even in the case of
the stabilization of the growth rate of money
mass. The rapid growth of
public debt economic
agents do not believe the promise of the Central
Bank to adhere to a low pace
money supply growth, and mistrust
inevitably destabilizie common
the macroeconomic situation. So
systematic control of the government
the dynamics of the budget deficit
is a necessary condition for successful
holding the Central Bank
anti-inflationary monetary policy.



In transition economies the choice
the optimal combination of courses
fiscal and monetary
policy is hampered by a number of specific
circumstances:



First, there is often a lack
required experience macroeconomic
regulation generally, and coordination experience
the actions of the government and the Central
the Bank in particular.



Second, it is objectively difficult
the problem of strengthening the credibility of economic
the government’s policy and Central
the Bank is further complicated in a situation
economic instability and mistrust
to individual officials.



Thirdly, often absent
the necessary social conditions for
ensure the successful anti-inflationary
deterrence at the expense of increasing unemployment.
For example, the absence in Belarus developed
infrastructure of labour market, which
would “forced out” of production
employees quickly to new
professions and new jobs makes
socially risky conduct
tough anti-inflationary policy
the method of “shock therapy”.



The combination of these circumstances
leads to the predominance of arbitrary
macroeconomic policies of the government
and the Central Bank, which is not
promotes trust and
prevents the rationalization of economic
expectations. However, some measures
economic policy – for example,
the establishment of a currency corridor –
allow us to think about the fact that the government
and the Central Bank begin to “instill”
economic agents form rational
behavior. In favor of the conclusion about the possibility of
the movement toward rationalization
expectations evidenced by the abundance of
macroeconomic data in
the periodical press and the emergence of
the structure of private firms special
analytical units designed
to give informed, “rational”
predictions of the future state of the economy,
on the basis of which non-state
the sector will make economic
solutions.



CONCLUSION



Thus the economy
it is an important problem – the problem of choice
between the two models.



With the policy of “freedom of action”
the government and the Central Bank can
free to manipulate the public
expenses, taxes and money supply
based on the assessment of the economic situation
without any pre-defined
quantitative restrictions.



As for the policy of “hard
of course”, his supporters believe that
given the problems of time lags and
the prediction error is better to follow
established for a long time
rules that are just as if
“on average,” than to pursue a policy
free activism, which can
end as benefit and harm.



In this work, we have considered:
the policy of “fixed rate” and
the policy of “freedom of action”, the problem
the choice between these two models, and
the contradictory goals
macroeconomic regulation and
the problem of coordination of courses
fiscal and monetary
policy.


LIST
LITERATURE



  1. Ally
    V. A.
    Macroeconomics.
    Pskov, PSPI, 2003 – 04 S.


  2. Ovchinnikov
    G. P., Yakovlev E. B.,

    Macroeconomics – SPb.: Search, 2006 – 367
    C.


  3. Kiseleva
    E. A.,

    Macroeconomics. Lectures: Training
    Handbook – M.: Eksmo, 2006 – 352.


  4. Agapov
    T. A., Seregina S. F.
    Macroeconomics:
    The textbook/Under the General editorship of A. V. Sidorovich. –
    M:.MSU, publishing house of “DIS”, 2004




1
Agapova T. A.,
Seregina S. F.
Macroeconomics:
The textbook/Under the General editorship of A. V. Sidorovich. –
M:.MSU, publishing house of “DIS”, 2004




15


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