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BPEA Article

Fiscal-Monetary Activism: Some Analytical Issues

Abstract

This paper covers the same basic issue of activism versus rules, but it
seeks to identify the analytical issues in the debate and to relate them to an
important theoretical literature on decision strategy in policy making. I
shall appraise the case against activism, which is a set of several related,
and yet separate, charges. A selection of quotes from the critics may illustrate
these charges. Milton Friedman points out the limitations in our
'ability to predict both the behavior of the system in the absence of action
and the effect of action" and the time-consuming process of correcting
deviations which involves three types of lags: "(1) the lag between the need
for action and the recognition of this need; (2) the lag between recognition
of the need for action and the taking of action; and (3) the lag between the
action and its effects."

Author

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