Summary of the course Economic Policy in English. It gave me a 16/20! It is a combination of the slides and extra information. Detailed but not too much so it is easy to study. Studying this summary should be sufficient to pass this course.
1. Introduction
2. Fiscal Policy
3. Monetary Policy
4...
Introduction ______________________________________________________________________________ 4
A primer on economic policy: the hows and the whys ____________________________________________ 4
Main types of economic policy ____________________________________________________________ 4
3 alternative approaches ________________________________________________________________ 4
What do policymakers do in practice? ______________________________________________________ 4
The general framework _________________________________________________________________ 4
Trade-offs are part of a government’s everyday life ___________________________________________ 5
3 key functions of economic policy ________________________________________________________ 5
More on ALLOCATION – Why intervene?____________________________________________________ 6
More on STABILISATION – Why intervene? __________________________________________________ 6
Allocation versus stabilization ____________________________________________________________ 6
More on REDISTRIBUTION – Why intervene? ________________________________________________ 6
Interdependence ______________________________________________________________________ 7
Discretion versus rules __________________________________________________________________ 7
Evaluation and limits of economic policy making ________________________________________________ 8
Evaluating economic policies _____________________________________________________________ 8
The limits of economic policy _____________________________________________________________ 8
The limits of benevolence (=welwillendheid) ________________________________________________ 8
GDP: king of economic measurement, but only a (bad) proxy of human well-being _____________________ 9
Economic policy in practical terms _________________________________________________________ 9
GDP is king of economic measurement… ____________________________________________________ 9
GDP as a (bad) proxy of human well-being __________________________________________________ 9
Economic policy in VUCA world, full of shocks/chaos, regime changes and trends _____________________ 10
Economic policy in a VUCA world _________________________________________________________ 10
Technocrats at the helm (aan het roer) ____________________________________________________ 10
A constantly changing environment _______________________________________________________ 10
Is it possible to be prepared for a crisis? ___________________________________________________ 11
Fiscal policy ______________________________________________________________________________ 12
Public finances and the stance (de stand) of fiscal policy: an introduction ___________________________ 12
Public finances and fiscal policy __________________________________________________________ 12
The fiscal policy stance _________________________________________________________________ 13
Public defitis on the rise ________________________________________________________________ 14
The effectiveness of fiscal policy: does it really work? ___________________________________________ 14
The effectiveness of automatic stabilisers __________________________________________________ 14
The effectiveness of discretionary policy ___________________________________________________ 15
Austerity (bezuiniging) versus stimulus (stimulering) _________________________________________ 16
Public debt: does its size matter? What drives debt dynamics? ____________________________________ 17
Public debt (overheidsschuld) ___________________________________________________________ 17
Public debt on the rise _________________________________________________________________ 18
Belgium’s public finances over the long term _______________________________________________ 18
The burden of public debt ______________________________________________________________ 18
The mechanism of debt dynamics ________________________________________________________ 19
Public debt sustainability _______________________________________________________________ 20
The role of public debt structure _________________________________________________________ 20
Gross debt versus net debt (bruto schuld versus netto schuld) _________________________________ 21
1
, Implicit public debt = ‘hidden debt’ _______________________________________________________ 21
The EU framework for fiscal surveillance and fiscal rules after Covid-19_____________________________ 21
The EU mechanism for fiscal surveillance __________________________________________________ 21
Fiscal policy in Covid-19 times ___________________________________________________________ 22
Next Generation EU, the need for a fiscal union and the limits of the ECB’s bond buying _______________ 23
Next generation EU (NGEU) _____________________________________________________________ 23
Currency union without a central budget __________________________________________________ 23
The ECB to the rescue __________________________________________________________________ 24
Monetary policy __________________________________________________________________________ 24
What do central banks do? What are the key objectives? ________________________________________ 24
Monetary policy – an introduction ________________________________________________________ 24
The toolkit (instruments) and transmission mechanism of monetary policy __________________________ 26
The general framework of monetary policy _________________________________________________ 26
Instruments of (conventional) monetary policy______________________________________________ 27
Operating and intermediate targets of monetary policy _______________________________________ 28
Transmission mechanism of monetary policy _______________________________________________ 28
Monetary policy – an introduction ________________________________________________________ 28
Monetary policy and the exchange rate regime _____________________________________________ 29
Whatever it takes: unconventional monetary policy in crisis times _________________________________ 29
Monetary policy in crisis times ___________________________________________________________ 29
Going negative _______________________________________________________________________ 30
Ultra-low policy rates all over the place ____________________________________________________ 30
Central banks’ balance sheets (grafiek in ppt) _______________________________________________ 30
Bond yields increasingly driven by central banks (obligatierendementen) _________________________ 31
Forward guidance on the stance of monetary policy _________________________________________ 31
Financial stability function in crisis times ___________________________________________________ 31
Evaluating loose monetary policy_________________________________________________________ 31
Where from here? The new Fed and ECB policy strategy. A cautious exit from monetary stimulus. _______ 32
Monetary policy on the move ___________________________________________________________ 32
A cautious exit from monetary expansion __________________________________________________ 33
Paradigm shifts: Green Monetary Policy, Central Bank Digital Currencies, Modern Monetary Theory _____ 34
Green Monetary Policy _________________________________________________________________ 34
Central bank digital currencies ___________________________________________________________ 35
Modern Monetary Theory ______________________________________________________________ 36
Labour market policy ______________________________________________________________________ 38
Some concepts and definitions. The cost of being unemployed. ___________________________________ 38
Concepts and definitions _______________________________________________________________ 38
The unemployment rate ________________________________________________________________ 39
A broader view _______________________________________________________________________ 39
The unemployment number gets a lot of attention __________________________________________ 39
The costs of being unemployed __________________________________________________________ 39
Theories on the existence of unemployment: various causes and forms _____________________________ 40
Theories on the existence of unemployment _______________________________________________ 40
Active labour market policies: do they work? __________________________________________________ 42
From concepts and theories to policy _____________________________________________________ 42
Active labour market policies (ALMPs)_____________________________________________________ 42
Focus on specific groups at risk on the labour market ________________________________________ 43
Shifting the Beveridge curve_____________________________________________________________ 43
Active labour market policies ____________________________________________________________ 43
2
, The role of labour market institutions: are they employment-unfriendly? ___________________________ 44
The role of labour market institutions _____________________________________________________ 44
Labour market faces many challenges: the need for structural reforms _____________________________ 45
Challenges for labour markets now and in the future _________________________________________ 45
The new OECD Jobs Strategy ____________________________________________________________ 46
The need for structural reforms __________________________________________________________ 46
Labour market reforms and economic growth ______________________________________________ 46
Supply-side policy _________________________________________________________________________ 47
What it is about: policies designed to improve the economy’s productive capacity ____________________ 47
What is supply-side policy? _____________________________________________________________ 47
The benefits of growth: why does economic growth matter? _____________________________________ 47
Why growth is so important _____________________________________________________________ 47
Economic growth and poverty reduction ___________________________________________________ 47
Is eternal (eeuwige) economic growth on a finite (eindige) planet possible?_______________________ 47
Why the growth rate is so important ______________________________________________________ 48
Why growth is so important _____________________________________________________________ 48
How supply-side policies work: advantages, types and limitations _________________________________ 48
Supply-side policies – The advantages _____________________________________________________ 48
Supply-side policies – Types _____________________________________________________________ 48
Supply-side policies – Some examples _____________________________________________________ 49
Supply-side policies____________________________________________________________________ 49
Limitations of supply-side policies ________________________________________________________ 49
Technological innovation, a major force in economic growth _____________________________________ 50
Neoclassical growth theory _____________________________________________________________ 50
The contribution from productivity to growth_______________________________________________ 50
Slowing productivity to growth is a concern ________________________________________________ 50
Is the slump (de malaise) here to stay? ____________________________________________________ 50
The importance of innovation ___________________________________________________________ 51
The impact of the pandemic and ongoing trends (population ageing and climate change) ______________ 51
Possible longer-lasting effects of Covid-19 on the economic growth potential _____________________ 51
Implications of population ageing ________________________________________________________ 51
Implications of climate change ___________________________________________________________ 53
3
,Introduction
A primer on economic policy: the hows and the whys
Main types of economic policy
Fiscal policy: changes in government spending or taxation to influence
macroeconomic conditions
Monetary policy: changes in the money supply or interest rates usually to influence the
rate of inflation (= a general increase in prices and fall in the
purchasing value of money)
Labour market policy: interventions in the labour market to protect workers in adverse
circumstances and to help the unemployed find work
Supply-side policy: attempts to increase the productive capacity of the economy
3 alternative approaches
An economist can adopt diverse attitudes regarding policy decision
Positive economics: limiting oneself to studying the effects of policy decisions on the
economy
• Outside observer’s viewpoint, policy decisions are seen as exogeneous
• Example: “What is the effect of a rise in the policy interest rate of inflation?”
Normative economics: seeking to influence policy decisions trough recommendations base
on one’s expertise
• Economist adopts the posture of a policy advisor (how to design and implement policies)
• Implies normative assessments (=schattingen) (explicit or implicit assumptions about social
preferences)
• Example: “What monetary policy to prop up recovery while maintaining long-term price
stability?”
Political economics: taking policy decisions as a topic for research and study their
determinants
• Takes the viewpoint of an external observer and considers the policymakers’ behaviour as
endogenous
• The policymakers are regarded a machine directed by politicians
• Example: “Should the central bank’s mandate give more emphasis on financial stability?”
What do policymakers do in practice?
• Set and enforce the rules of the economic game
o Economic legislation proved the framework for the decisions of private agents
• Collect taxes and spend them
o Public spending often amounts to close to one-half of GDP in developed countries
• Produce public goods and services
o Providing education, healthcare, public transport
• Issue and manage the currency
o Choice of a monetary and exchange-rate system
• Fix all kind of economic problems
o Ministers are held responsible for a vast array of economic issues
• Negotiate economic matters with other countries
o On matters like trade liberalisation, sustainable development goals, …
The general framework
Onderscheid maken tussen:
• Policy objectives (doelstellingen) which are numerous and sometimes contradictory
4
, o Full employment, price stability, …
• Policy instruments
o Fiscal policy, monetary policy, trade policy, …
• Institutions and the (uncertain) environment
o Independent central bank, wage setting procedures, trade unions
o Demographics, policies conducted by other countries, …
ð Policymakers are instruments to reach objectives put forward, knowing that the relationship
between the two depends on institutions and the environment
2 approaches:
• Standard: institutions and environment are given
• Structural: reform and change the institutions (institutions are not eternal (=eeuwig))
Trade-offs are part of a government’s everyday life
Trade-offs zijn afhankelijk van preferenties
• How much more wage inequality the government stand ready to accept to reduce the
unemployment rate by one percentage point?
Original Philips curve
• Tradeoff between inflation and unemployment > unemployment decreases à inflation will
rise
Employment growth vs. productivity growth
• Some countries: fewer people work, but productivity is higher of those who work
• Other countries: much better performance about employment but at the price of weaker
productivity
• Answer to this tradeoff: reshaping institutions (requiring supply-side policies).
o More investments in education and lifelong learning, environment that fosters
innovation, …
3 key functions of economic policy
Allocation function: dividing total resource use between private and social/public goods and choosing
the mix of social/public good
• Improving efficiency in the economic system
• E.g: infrastructure, education, competition
Stabilization function: eliminating short-term rigidities and business cycle fluctuations
• Achieving the main macroeconomic objectives set by policymakers to ensure stable
economic growth, price stability, and sustainable external accounts
• E.g: expansionary/restrictive monetary and fiscal policies
Distribution function: ensuring fairness by adjusting the primary distribution of income or wealth
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