Economic policies are the systems used by governments to make interventions in the economic well-being of their countries. Recently, various major economies in the world have redeveloped the fundamental economic policies due to the several macroeconomic issues experienced worldwide over the last decade. The financial crisis in 2008 and the resultant global recession contributed to rapid changes in the political and economic fortunes in the U.S., Europe, and the Far East. The recent popularity of nationalistic politics and economic policies has attracted a wide range of economic researches aimed at identifying the best practices, and their potential implications. This paper reviews five recent academic articles, which the current economic policy formulation practices exploring.
Lavoie, M. (2018). Rethinking Macroeconomic Theory before the Next Crisis. Review of Keynesian Economics, 6(1), 1-21.
Marc Lavoie identifies the influence of the economic recessions on defining economic policies in each country. The article identifies that the trend of uniting monetary and macroeconomic theory was a reactionary move to improve economic performance during the Asian financial crisis in the mid-90s. However, the short-term success of economic policies often overshadows some underlying weaknesses that ultimately negate any advantages sought during their implementation. According to Lavoie (2018), the influence of economic policies on monetary policies can be adverse, especially when they are developed based on the reactionary politics. The American subpar mortgage crisis that ultimately led to a global financial crisis and the recession was a result of poor monetary guidelines linked to economic policies aimed at spurring investor confidence in the American economy after the terrorist attacks of 9/11, and the subsequent invasion of Iraq and Afghanistan. The success of the economic theory in averting depression and inducing recovery cannot be guaranteed when it might consequently create an unintended economic crisis (Lavoie, 2018). Thus, the article proposes governments to limit their interference in the economic fortunes of their countries. Politicians are incapable of developing economic models based on rational expectations as they seek to define their political policies. To avert such crises in the future, the article suggests relying on neo-classical economic models less and reverting to the more independent Keynesian economic models.
Vines, D., " Wills, S. (2018). The Rebuilding Macroeconomic Theory Project: an Analytical Assessment. Oxford Review of Economic Policy, 34(1-2), 1–42.
Vines and Wills (2018) identify the process of developing a new macroeconomic model in the beginning of the 2008 financial crisis. They interview the leading macroeconomist involved in developing the new Keynesian model to identify the weaknesses of previous frameworks as well as their implementation by different governments. The article identifies four main changes in economic policy necessary to avert such crisis in the future. They include the definition of financial frictions in each economy, a review of the limits placed on rational economic expectations, the inclusion of heterogeneous agents, and the development of appropriate micro-foundations (Vines " Wills, 2018). The article proposes the evolution of economic policy and models to include a pluralist approach to policy development rather than a total change in the economic policy perception. While previous economic models might have exposed economies to some weaknesses, some of their aspects have profound advantages in maintaining the economic stability. The authors identify a common trend among their respondents that suggests a review of the behavioral equations adopted in the development of economic models that define price-setting, investments, as well as government and household consumption. The authors conclude that there should be a distinct differentiation between the interest rate set under the preferred economic policy and the one favored by the local consumers and investors to enable governments to react quickly to economic pressures that may lead to the crisis.
Arestis, P. (2018). A Coherent Approach to Macroeconomic Theory and Economic Policies. In Alternative Approaches in Macroeconomics (pp. 127-154). New York, NY: Springer
Arestis (2018) identifies the inadequacy of current macroeconomic theories and policies in maintaining economic stability as evidenced by past crises. He suggests a new approach in the development of macroeconomic policies based on the assumption that there is often a shortage in demand in relation to the expectations of those seeking the full employment of the available factors of production. Therefore, the formulation of economic models should not rely on the idea that they can fully exploit factors of production as it usually tends to lead to insufficiencies in tackling the challenges, especially when they fail to meet the expectations. Full employment is often compromised by varying levels of distribution in productive capacity. As such, it is crucial to consider this variance in the economic analysis and the development of new macroeconomic policies. Arestis (2018) explores the theoretical framework used when developing economic policies that are relevant to each country’s economic and political situation. The author also introduces two new economic policies, which are financial stability and distributional effects. Thus, developing the economic models, it is important to consider these two guidelines alongside the traditional monetary and fiscal policies, as well as their coordination and subsequent evaluation to ensure their success.
Flaig, D., Haugh, D., Kowalski, P., Rouzet, D., " Tongeren, F. (2018). Miracle or Mirage: What Role Can Trade Policies Play in Tackling Global Trade Imbalances? Paris: OECD Publishing.
Flaig et al. (2018) identify that imbalance in global trade is a major concern in many countries as evidenced by the shift in economic policy towards more nationalist and protectionist models. While trade imbalance may not be a new phenomenon, its recurrence after the narrowing experienced in the aftermath of the 2008 financial crisis surprised many economic policymakers. Flaig et al. (2018) seek to identify the extent to which trade policies cause imbalances and the effects of trade policy distortion on those imbalances. They also identify reforms that create a narrowing in trade imbalance while improving efficiency and the economic welfare of a country’s citizens. They apply the OECD general equilibrium model to identify qualitative and quantitative aspects of trade imbalance that inform policy changes.
Bloch, D., " Fournier, J. (2018). The Deterioration of the Public Spending Mix during the Global Financial Crisis: Insights from New Indicators. Paris: OECD Publishing.
The article suggests a set of indicators that inform policymakers how to evaluate their public spending mix and the efficiency of their fiscal policies. The authors use international comparisons and studies to develop fiscal and monetary policies that are specific to each country’s production capacity and competitiveness. Bloch and Fournier (2018) identify that most policymakers rarely apply those studies when examining the quality of their public spending in a bid to spur their country’s economic growth. The authors introduce a robustness analysis that is also successful in recognizing the inequality effects created by a specific public expenditure mix. The level and size of public spending often tend to differ based on the economic situation of a country. However, the last financial crisis in 2008 introduced new concepts in monetary and fiscal policy that spur economic growth, as well as identify the quality of growth based on the distribution of public expenditure. The article suggests a set of indicators that show that the quality of public spending has worsened in OECD countries, negatively affecting their possibilities of maintaining long-term development (Bloch " Fournier, 2018). The authors combine pointers of public spending with those of public revenue to detect the effect of a specific tax mix in inducing inclusive economic growth.
Conclusion
Current economic policy issues focus on the development of economic models that allow countries to react appropriately to changes in the global economy that may cause challenges similar to those experienced in the last few decades. Most of the available economic literature on the subject focuses on developing new concepts that will ensure the formulation of robust economic policies that are independent of the political and financial fortunes of a nation.
References
Arestis, P. (2018). A Coherent Approach to Macroeconomic Theory and Economic Policies. In Alternative Approaches in Macroeconomics (pp. 127-154). New York, NY: Springer
Bloch, D., " Fournier, J. (2018). The deterioration of the public spending mix during the global financial crisis: Insights from new indicators. Paris: OECD Publishing.
Flaig, D., Haugh, D., Kowalski, P., Rouzet, D., " Tongeren, F. (2018). Miracle or Mirage: What role can trade policies play in tackling global trade imbalances? Paris: OECD Publishing.
Lavoie, M. (2018). Rethinking macroeconomic theory before the next crisis. Review of Keynesian Economics, 6(1), 1–21. Retrieved from https://econpapers.repec.org/article/elgrokejn/v_3a6_3ay_3a2018_3ai_3a1_3ap1-21.htm
Vines, D., " Wills, S. (2018). The rebuilding macroeconomic theory project: an analytical assessment. Oxford Review of Economic Policy, 34(1-2), 1–42. doi:10.1093/oxrep/grx062
