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Macroeconomic Policies and Growth

Author

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  • 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.

Suggested Citation

  • Palle Andersen & David Gruen, 1995. "Macroeconomic Policies and Growth," RBA Research Discussion Papers rdp9507, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9507
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Frederic S. Mishkin, 2000. "What should central banks do?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-14.
    3. Frederic S. Mishkin, 2008. "Does Stabilizing Inflation Contribute To Stabilizing Economic Activity?," NBER Working Papers 13970, National Bureau of Economic Research, Inc.
    4. Andrés Felipe Londoño & Jorge Andrés Tamayo & Carlos Alberto Velásquez, 2012. "Dinámica de la política monetaria e inflación objetivo en Colombia: una aproximación FAVAR," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 30(68), pages 14-71, Junio.
    5. Luke Byrne Willard, 2012. "Does inflation targeting matter? A reassessment," Applied Economics, Taylor & Francis Journals, vol. 44(17), pages 2231-2244, June.
    6. 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.
    7. Jérôme Creel & Éloi Laurent & Jacques Le Cacheux, 2007. "Politiques et performances macroéconomiques de la zone euro. Institutions, incitations, stratégies," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 249-281.
    8. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
    9. 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.
    10. José Mauricio Gil León, 2015. "Posturas de política monetaria ante fluctuaciones de la economía: una revisión de la evolución teórica," REVISTA FINANZAS Y POLÍTICA ECONÓMICA, UNIVERSIDAD CATOLICA DE COLOMBIA, vol. 7(2), pages 381-401, July.
    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. 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.
    13. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    14. 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.
    15. 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.
    16. 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.

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