Advanced Search
MyIDEAS: Login to save this paper or follow this series

Macroeconomic Policies and Growth

Contents:

Author Info

  • Palle Andersen

    (Reserve Bank of Australia)

  • David Gruen

    (Reserve Bank of Australia)

Abstract

While economic theory is largely mute on the question of whether macroeconomic policies affect long-run growth, an examination of the experience of different countries over various periods and the policies they pursued, lends strong support to the idea that macro policies do play a role in the growth process. A macroeconomic policy framework conducive to growth can be characterised by five features: a low and predictable inflation rate; an appropriate real interest rate; a stable and sustainable fiscal policy; a competitive and predictable real exchange rate; and a balance of payments that is regarded as viable. Countries with these macroeconomic characteristics tend to grow faster than those without them, though there are many individual cases of both developing and developed countries suggesting that satisfying only some of these conditions does not sustain strong growth. It is also important to recognise that the direction of causation is somewhat ambiguous: while good macro outcomes should be conducive to growth, strong growth is also conducive to good macroeconomic outcomes. The paper presents a wide-ranging examination of both theoretical and empirical evidence on the many ways macroeconomic policies may influence economic growth. Given monetary policy’s crucial role in determining the inflation rate in the longer run, there is a particular emphasis on the relationship between inflation and growth. The following five broad conclusions are drawn. First, although growth models assign a major role to capital accumulation, there is little evidence that aggregate investment yields excess returns, and so special policy incentives to boost aggregate investment appear inappropriate. Second, countries with low national saving invest less and grow more slowly than they would if saving were higher. Ultimately, the extent to which a country can rely on foreign savings to fund domestic investment and growth depends on the rate of capital inflow the market accepts as sustainable. For Australia, with abundant natural resources and a stable political environment, this may be higher than for many other capital importing countries. Third, declining national saving rates in many industrial countries are primarily a consequence of lower government saving, suggesting a need for reduced fiscal deficits. In Australia, however, private savings have also fallen substantially, suggesting a possible role for specific incentives to boost private savings. Fourth, when economies are near potential, short-run rises in output seem to be more inflationary than falls in output are disinflationary. This implies that macroeconomic policy acting pre-emptively to counter expected future demand pressures and quickly mitigating the effects of unexpected shocks has a positive effect on the level of output, compared with a more hesitant approach acting only when demand pressures have appeared. Further, provided inflation is kept close to its target in the medium term, policy which tolerates some short-term deviations of inflation from its target reduces fluctuations in real output and generates a higher long-run output level than a policy with the sole goal of keeping inflation close to its target. Finally, although most economists believe even moderate rates of inflation adversely affect growth, unambiguous evidence has been difficult to come by. There is still professional disagreement on the robustness of the empirical evidence, but it does appear that higher inflation, and the associated increased uncertainty about future inflation, adversely affects growth in the industrial countries. The gains from lower inflation appear to exceed the initial costs of reducing inflation within about a decade.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.rba.gov.au/publications/rdp/1995/pdf/rdp9507.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9507.

as in new window
Length:
Date of creation: Oct 1995
Date of revision:
Handle: RePEc:rba:rbardp:rdp9507

Contact details of provider:
Postal: GPO Box 3947, Sydney NSW 2001
Phone: 61-2-9551-8111
Fax: 61-2-9551-8000
Email:
Web page: http://www.rba.gov.au/
More information through EDIRC

Order Information:
Web: http://www.rba.gov.au/forms/rdp-order-form/

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Stanley Fischer & Franco Modigliani, 1978. "Towards an understanding of the real effects and costs of inflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 810-833, December.
  2. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  3. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  4. Crafts, Nicholas & Toniolo, Gianni, 1995. "Post-war Growth: An Overview," CEPR Discussion Papers 1095, C.E.P.R. Discussion Papers.
  5. repec:fth:harver:1418 is not listed on IDEAS
  6. Adrian Orr & Malcolm Edey & Michael Kennedy, 1995. "The Determinants of Real Long-Term Interest Rates: 17 Country Pooled-Time-Series Evidence," OECD Economics Department Working Papers 155, OECD Publishing.
  7. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  9. Jacqueline Dwyer & Christopher Kent, 1993. "A Re-examination of the Determinants of Australia’s Imports," RBA Research Discussion Papers rdp9312, Reserve Bank of Australia.
  10. Robert J. Gordon, 1995. "Is There a Tradeoff between Unemployment and Productivity Growth?," NBER Working Papers 5081, National Bureau of Economic Research, Inc.
  11. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.
  12. Robert S. Pindyck & Andrés Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318 National Bureau of Economic Research, Inc.
  13. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  14. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 329-379 National Bureau of Economic Research, Inc.
  15. Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
  16. Steve Dowrick, 1995. "The Determinants of Long-Run Growth," RBA Annual Conference Volume, in: Palle Andersen & Jacqueline Dwyer & David Gruen (ed.), Productivity and Growth Reserve Bank of Australia.
  17. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, vol. 39(3-4), pages 399-420, April.
  18. Crafts, Nicholas & Mills, Terence C, 1995. "Europe's Golden Age: An Econometric Investigation of Changing Trend Rates of Growth," CEPR Discussion Papers 1087, C.E.P.R. Discussion Papers.
  19. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  20. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
  21. Jeffrey D. Sachs & Andrew M. Warner, 1995. "Economic Convergence and Economic Policies," Harvard Institute of Economic Research Working Papers 1715, Harvard - Institute of Economic Research.
  22. Tamim Bayoumi & Michael W. Klein, 1995. "A Provincial View of Capital Mobility," NBER Working Papers 5115, National Bureau of Economic Research, Inc.
  23. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Working Papers 3702, National Bureau of Economic Research, Inc.
  24. Guy Debelle & Glenn Stevens, 1995. "Monetary Policy Goals for Inflation in Australia," RBA Research Discussion Papers rdp9503, Reserve Bank of Australia.
  25. Otto, Glenn & Voss, Graham M, 1994. "Public Capital and Private Sector Productivity," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 121-32, June.
  26. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  27. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
  28. Otto, Glenn & Voss, Graham, 1996. "Public Capital and Private Production in Australia," MPRA Paper 52110, University Library of Munich, Germany.
  29. Gruen, David W R & Smith, Jeremy, 1994. "Excess Returns in a Small Open Economy," The Economic Record, The Economic Society of Australia, vol. 70(211), pages 381-96, December.
  30. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
  31. repec:fth:calaec:16-92 is not listed on IDEAS
  32. Hughes, Helen, 1995. "Why Have East Asian Countries Led Economic Development?," The Economic Record, The Economic Society of Australia, vol. 71(212), pages 88-104, March.
  33. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
  34. Jørgen Elmeskov & Jeffrey Shafer & Warren Tease, 1991. "Savings Trends and Measurement Issues," OECD Economics Department Working Papers 105, OECD Publishing.
  35. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  36. Boltho, Andrea & Holtham, Gerald, 1992. "The Assessment: New Approaches to Economic Growth," Oxford Review of Economic Policy, Oxford University Press, vol. 8(4), pages 1-14, Winter.
  37. Maddison, Angus, 1992. " A Long-Run Perspective on Saving," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 181-96.
  38. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  39. Leamer, Edward E, 1983. "Let's Take the Con Out of Econometrics," American Economic Review, American Economic Association, vol. 73(1), pages 31-43, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
  2. Mishkin, Frederic S., 2001. "Financial policies and the prevention of financial crises in emerging market economies," Policy Research Working Paper Series 2683, The World Bank.
  3. Bucciarelli Edgardo & Pagliari Carmen & Muratore Fabrizio, 2010. "European Labour Productivity And Corporate E-Learning Activities: An Empirical Analysis," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 170-177, July.
  4. Frederic S Mishkin, 1997. "Strategies for Controlling Inflation," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  5. Frederic S. Mishkin, 2001. "Financial Policies and the Prevention of Financial Crises in Emerging Market Countries," NBER Working Papers 8087, National Bureau of Economic Research, Inc.
  6. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
  7. Frederic S. Mishkin, 2008. "Does Stabilizing Inflation Contribute To Stabilizing Economic Activity?," NBER Working Papers 13970, National Bureau of Economic Research, Inc.
  8. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
  9. Joon-Ho Hahm & Frederic S. Mishkin, 2000. "Causes of the Korean Financial Crisis: Lessons for Policy," NBER Working Papers 7483, National Bureau of Economic Research, Inc.
  10. Frederic S. Mishkin, 1997. "The causes and propagation of financial instability : lessons for policy makers," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 55-96.
  11. Frederic S. Mishkin & Andrew Crockett & Michael P. Dooley & Montek S. Ahluwalia, 2003. "Financial Policies," NBER Chapters, in: Economic and Financial Crises in Emerging Market Economies, pages 93-154 National Bureau of Economic Research, Inc.
  12. Frederic S. Mishkin, 2000. "What should central banks do?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-14.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp9507. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.