policy and policymakers

The effects of macroeconomic policies are always uncertain.
This uncertainty should lead policymakers to be
more cautious and to use less active policies.
Policies must be broadly aimed at avoiding prolonged recessions, slowing down booms and avoiding inflationary pressure.
The higher the level of unemployment or inflation, the stronger the policies should be. But they should stop short of fine-tuning, of trying to maintain constant unemployment or constant output growth.

Using macroeconomic policy to control the economy is fundamentally different from controlling a machine.
Unlike a machine, the economy is composed of people and firms who try to anticipate what policymakers will do and who react not only to current policy but also to expectations of future policy.

In this sense, macroeconomic policy can be thought of as a game between policymakers and people in the economy.

When playing a game, it is sometimes better for a player to give up some options. For example,
- when a hostage taking occurs, it is better to negotiate with the hostage takers.
- But a government that credibly commits to not negotiating with hostage takers – a government that…

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