{{Short description|Actions that governments take in the economic field}} {{Economics sidebar|application}} '''Economic policy''' refers to government actions setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, and many other areas of government interventions into the economy. Economic policy is a broad term for both the goals governments pursue and the tools they use.

Most economic policy instruments can be divided into either fiscal policy, which deals with government revenue and expenditure decisions, or monetary policy, which deals with central banking actions regarding the money supply and interest rates. In addition, governments shape economies through industrial policy, regulatory frameworks, redistribution through taxes and transfers, and trade policy.<ref name=":0" /> At the international level, institutions such as the International Monetary Fund and World Bank shape policy formulation.<ref>{{Cite book |last=Mercille |first=Julien |url=https://www.google.com/books/edition/Deepening_Neoliberalism_Austerity_and_Cr/3ZsMCgAAQBAJ?hl=en&gbpv=1&dq=%22economic+policy%22+%22international+institutions%22+influence+IMF+World+Bank&pg=PA38&printsec=frontcover |title=Deepening Neoliberalism, Austerity, and Crisis: Europe’s Treasure Ireland |last2=Murphy |first2=Enda |date=2015-07-07 |publisher=Springer |isbn=978-1-137-46876-5 |pages=38 |language=en}}</ref>

The intellectual foundations of economic policy have shifted dramatically across history. Mercantilist doctrines dominated European states from the seventeenth century until challenged by classical economists such as Adam Smith.<ref name=":1" /> The Great Depression of the 1930s discredited laissez-faire orthodoxy and gave rise to Keynesian demand management,<ref name=":2" /> which itself came under attack during the stagflation of the 1970s.<ref name=":3" /> The late twentieth century saw a turn toward inflation targeting central banks, fiscal rules, and market liberalization,<ref name=":4" /> while the 2008 financial crisis and the COVID-19 pandemic of 2020 prompted a scale of government intervention not seen since the postwar era.<ref name=":5" />

A persistent challenge in economic policy is that desirable goals often conflict.<ref name=":6" /> Policies that reduce unemployment can raise inflation,<ref name=":6" /> and expansionary fiscal policy can crowd out private investment.<ref name=":7">{{Cite book |last=Gupta |first=Kanhaya |url=https://www.google.com/books/edition/Budget_Deficits_and_Economic_Activity_in/w_iJAgAAQBAJ?hl=en&gbpv=1&dq=fiscal+policy+Ricardian+equivalence+crowding+out&pg=PA125&printsec=frontcover |title=Budget Deficits and Economic Activity in Asia |date=2006-07-13 |publisher=Routledge |isbn=978-1-134-93650-2 |pages=125 |language=en}}</ref> These trade-offs remain central concerns in economic debates along with whether policy should be based on rules or discretion.<ref name=":8" />

==Types of economic policy== === Fiscal policy === Fiscal policy encompasses government decisions about taxation and public expenditure. It is grounded primarily in Keynesian economics, which holds that aggregate demand drives output and employment in the short run.<ref>{{Cite book |last=Gwartney |first=James D. |url=https://www.google.com/books/edition/Economics/NtejBQAAQBAJ?hl=en&gbpv=1&dq=fiscal+policy+government+taxation+spending+aggregate+demand&pg=PA205&printsec=frontcover |title=Economics: Private and Public Choice |last2=Stroup |first2=Richard |date=2014-05-10 |publisher=Academic Press |isbn=978-1-4832-6443-1 |pages=205 |language=en}}</ref> With private demand shortfalls in a recession, the government can sustain activity as a spender of last resort by running a deficit.<ref>{{Cite book |last=Gray |first=H. Peter |url=https://www.google.com/books/edition/An_Aggregate_Theory_of_International_Pay/5lCuCwAAQBAJ?hl=en&gbpv=1&dq=private+demand+spender+last+resort+deficit&pg=PA53&printsec=frontcover |title=An Aggregate Theory of International Payments Adjustment |date=1974-06-18 |publisher=Springer |isbn=978-1-349-01768-3 |pages=53 |language=en}}</ref>

The fiscal stance describes whether the overall budget is expansionary (in deficit, injecting demand into the economy) or contractionary (in surplus, withdrawing it).<ref>{{Cite book |last=Wiemer |first=Calla |url=https://www.google.com/books/edition/Macroeconomics_for_Emerging_East_Asia/pLeiEAAAQBAJ?hl=en&gbpv=1&dq=%22fiscal+stance%22+surplus+contractionary+deficit+expansionary&pg=PA245&printsec=frontcover |title=Macroeconomics for Emerging East Asia |date=2022-12-01 |publisher=Cambridge University Press |isbn=978-1-009-18140-2 |pages=245 |language=en}}</ref> Fiscal adjustment occurs through automatic stabilizers, with tax revenues falling and unemployment benefits rising, absorbing economic fluctuations without legislative action.<ref>{{Cite book |last=Morrison |first=Fred L. |url=https://www.google.com/books/edition/Fiscal_Rules_Limits_on_Governmental_Defi/U2PUDAAAQBAJ?hl=en&gbpv=1&dq=automatic+stabilizers+unemployment+insurance+tax+revenue&pg=PA277&printsec=frontcover |title=Fiscal Rules - Limits on Governmental Deficits and Debt |date=2016-08-11 |publisher=Springer |isbn=978-3-319-41205-4 |pages=277 |language=en}}</ref> Discretionary fiscal measures such as stimulus packages sit on top of this automatic layer.<ref>{{Cite book |last=Carlin |first=Wendy |url=https://www.google.com/books/edition/Macroeconomics/eJjrEAAAQBAJ?hl=en&gbpv=1&dq=discretionary+stimulus+on+top+of+automatic&pg=PA319&printsec=frontcover |title=Macroeconomics: Institutions, Instability, and Inequality |last2=Soskice |first2=David W. |date=2024 |publisher=Oxford University Press |isbn=978-0-19-883866-1 |pages=319 |language=en}}</ref>

Critics of expansionary fiscal policy raise two main arguments. The Ricardian equivalence proposes that rational households will anticipate future tax increases to repay government debt, reducing the intended effect.<ref name=":7" /> The crowding out argument holds that government borrowing drives up interest rates, discouraging private investment and lessening the fiscal stimulus.<ref>{{Cite book |last=Carbaugh |first=Robert |url=https://www.google.com/books/edition/Contemporary_Economics/Z34IEQAAQBAJ?hl=en&gbpv=1&dq=crowding+out+government+borrowing+interest+rates+offset&pg=PA371&printsec=frontcover |title=Contemporary Economics: An Applications Approach |date=2024-05-29 |publisher=Taylor & Francis |isbn=978-1-040-02065-4 |pages=371 |language=en}}</ref> Proponents of fiscal policy argue that government spending multipliers are typically higher during downturns.<ref>{{Cite book |last=Acocella |first=Nicola |url=https://www.google.com/books/edition/Macroeconomic_Paradigms_and_Economic_Pol/VaYtDAAAQBAJ?hl=en&gbpv=1&dq=fiscal+government+spending+multipliers+downturns&pg=PA166&printsec=frontcover |title=Macroeconomic Paradigms and Economic Policy: From the Great Depression to the Great Recession |last2=Bartolomeo |first2=Giovanni Di |last3=Hallett |first3=Andrew Hughes |date=2016-05-31 |publisher=Cambridge University Press |isbn=978-1-316-67942-5 |pages=166 |language=en}}</ref> Empirical evidence is mixed, with the size of fiscal multipliers varying substantially.<ref>{{Cite book |last=Abor |first=Joshua Yindenaba |url=https://www.google.com/books/edition/Monetary_Economics_in_Emerging_and_Devel/ORonEQAAQBAJ?hl=en&gbpv=1&dq=fiscal+%22multipliers%22+vary+substantially&pg=PA187&printsec=frontcover |title=Monetary Economics in Emerging and Developing Countries |last2=Quartey |first2=Peter |last3=Nellis |first3=Joseph G. |last4=Subramanian |first4=Lakshmy |date=2024-11-07 |publisher=Taylor & Francis |isbn=978-1-040-17588-0 |pages=187 |language=en}}</ref>

Government spending encompasses public investment in infrastructure, education, and health that promotes productivity capabilities, as well as current spending on transfer payments.<ref>{{Cite book |last=Wakyereza |first=Ronald K. S. |url=https://www.google.com/books/edition/Foreign_Direct_Investment_as_a_Tool_for/_Rq7DwAAQBAJ?hl=en&gbpv=1&dq=public+investment+in+infrastructure,+healthcare,+education,+defence,+and+social+transfers+aggregate+demand&pg=PA69&printsec=frontcover |title=Foreign Direct Investment as a Tool for Poverty Reduction in Developing Countries: A Study on Uganda |date=2019-10-15 |publisher=Cambridge Scholars Publishing |isbn=978-1-5275-4166-5 |pages=69 |language=en}}</ref> Tax policy involves the balance between direct taxes on income and wealth and indirect taxes on consumption,<ref>{{Cite book |last=Premchand |first=Arigapudi |url=https://www.google.com/books/edition/Comparative_International_Budgeting_and/7oXQZtYDLykC?hl=en&gbpv=1&dq=tax+policy+%22structure%22+direct+indirect+taxation+government+revenue&pg=PA180&printsec=frontcover |title=Comparative International Budgeting and Finance |last2=Burkhead |first2=Jesse |date=1984-01-01 |publisher=Transaction Publishers |isbn=978-1-4128-2005-9 |pages=180 |language=en}}</ref> and the degree of progressivity: in which higher earners pay a larger share of their income. These distributional choices are subject to political disagreement.<ref>{{Cite book |last=Campbell |first=Andrea Louise |url=https://www.google.com/books/edition/Taxation_and_Resentment/SOw5EQAAQBAJ?hl=en&gbpv=1&dq=tax+progressivity+higher+earners+larger+share&pg=PA60&printsec=frontcover |title=Taxation and Resentment: Race, Party, and Class in American Tax Attitudes |date=2025-06-10 |publisher=Princeton University Press |isbn=978-0-691-13786-5 |pages=60 |language=en}}</ref>

=== Monetary policy === Monetary policy is conducted by a country's central bank, primarily by manipulating short-term interest rates. When inflation is high, central banks may raise interest rates to fight inflation.<ref>{{Cite book |last=Farhan |first=Ahmed |url=https://www.google.com/books/edition/Governance_and_Policy_Transformations_in/ztzzEAAAQBAJ?hl=en&gbpv=1&dq=central+bank+inflation+high+raise+interest+rates&pg=PA88&printsec=frontcover |title=Governance and Policy Transformations in Central Banking |last2=Ali |first2=Khan, Raza |date=2024-02-07 |publisher=IGI Global |isbn=979-8-3693-0836-3 |pages=88 |language=en}}</ref> When the economy is weak, central banks often lower interest rates, stimulating bank lending.<ref>{{Cite book |last=Ito |first=Takatoshi |url=https://www.google.com/books/edition/The_Japanese_Economy_second_edition/7OfIDwAAQBAJ?hl=en&gbpv=1&dq=central+bank+economy+weak+lower+rates+stimulate&pg=PA154&printsec=frontcover |title=The Japanese Economy, second edition |last2=Hoshi |first2=Takeo |date=2020-01-28 |publisher=MIT Press |isbn=978-0-262-35718-0 |pages=154 |language=en}}</ref> *Interest rates: influence the money supply through commercial bank creation of customer deposits.<ref>{{Cite book |last=Burke |first=John JA |url=https://www.google.com/books/edition/Financial_Services_in_the_Twenty_First_C/Fwo3EAAAQBAJ?hl=en&gbpv=1&dq=interest+rates+central+%22commercial+banks%22+%22create+money%22&pg=PA64&printsec=frontcover |title=Financial Services in the Twenty-First Century: The Present System and Future Developments in Fintech and Financial Innovation |date=2021-07-05 |publisher=Springer Nature |isbn=978-3-030-63967-9 |pages=64 |language=en}}</ref> *Open market operations: the central bank buys government securities to increase the money supply, or sells to reduce it.<ref>{{Cite book |last=Auerbach |first=Alan J. |url=https://www.google.com/books/edition/Macroeconomics/nnebIJ4iglcC?hl=en&gbpv=1&dq=%22open+market+operation%22+money+supply&pg=PA390&printsec=frontcover |title=Macroeconomics: An Integrated Approach |last2=Kotlikoff |first2=Laurence J. |date=1998 |publisher=MIT Press |isbn=978-0-262-01170-9 |pages=390 |language=en}}</ref> *Quantitative easing: purchasing assets as stimulus when interest rates are near zero.<ref>{{Cite book |last=Kokores |first=Ioanna T. |url=https://www.google.com/books/edition/Monetary_Policy_and_Financial_Stability/v1GqEAAAQBAJ?hl=en&gbpv=1&dq=quantitative+easing+stimulus+zero&pg=PA390&printsec=frontcover |title=Monetary Policy and Financial Stability: Challenges before and after the Global Financial Crisis |date=2022-12-08 |publisher=Cambridge Scholars Publishing |isbn=978-1-5275-9186-8 |pages=390 |language=en}}</ref> *Forward guidance: central bank communications about future policy intentions, used to affect market expectations.<ref>{{Cite book |last=Haan |first=Jakob de |url=https://www.google.com/books/edition/Financial_Markets_and_Institutions/jHPcDwAAQBAJ?hl=en&gbpv=1&dq=%22forward+guidance%22+intentions&pg=PA135&printsec=frontcover |title=Financial Markets and Institutions: A European Perspective |last2=Schoenmaker |first2=Dirk |last3=Wierts |first3=Peter |date=2020-04-30 |publisher=Cambridge University Press |isbn=978-1-108-49411-3 |pages=135 |language=en}}</ref> Since the late 1990s, most developed countries have granted central bank independence to avoid political pressure.<ref>{{Cite book |last=Hossain |first=Akhand Akhtar |url=https://www.google.com/books/edition/Central_Banking_and_Monetary_Policy_in_t/8YLRhs8jwCsC?hl=en&gbpv=1&dq=century+most+central+banks+independence+monetary+policy+political+pressure&pg=PA53&printsec=frontcover |title=Central Banking and Monetary Policy in the Asia-Pacific |date=2009-01-01 |publisher=Edward Elgar Publishing |isbn=978-1-84980-209-3 |pages=53 |language=en}}</ref>

The proper role of the government in the economy is an important political matter.<ref>{{Cite book |last=Waligorski |first=Conrad |url=https://www.google.com/books/edition/Liberal_Economics_and_Democracy/oaK6AAAAIAAJ?hl=en&gbpv=1&dq=government+%22economic+component%22&pg=PR12&printsec=frontcover |title=Liberal Economics and Democracy: Keynes, Galbraith, Thurow, and Reich |date=1997 |publisher=University Press of Kansas |isbn=978-0-7006-0803-4 |pages=xii |language=en}}</ref> A few examples of the kinds of economic policies that exist include:<ref>{{cite journal |first=Walter |last=Plosila |title=State Science- and Technology-Based Economic Development Policy: History, Trends and Developments, and Future Directions |journal=Economic Development Quarterly |volume=18 |number=2 |date=May 2004 |pages=113-126 }}</ref> *Macroeconomic stabilization policy, which attempts to smooth out the business cycle.<ref>{{Cite book |last=Roste |first=Ole |url=https://www.google.com/books/edition/Monetary_Policy_and_Macroeconomic_Stabil/HFYPEAAAQBAJ?hl=en&gbpv=1&dq=%22macroeconomic+stabilization+policy%22+business+cycle&pg=PA5&printsec=frontcover |title=Monetary Policy and Macroeconomic Stabilization: The Roles of Optimum Currency Areas, Sacrifice Ratios, and Labor Market Adjustment |date=2017-09-08 |publisher=Routledge |isbn=978-1-351-50488-1 |pages=5 |language=en}}</ref> *Fiscal policy includes government actions of spending, taxation, and borrowing.<ref>{{Cite book |last=Tan |first=Kim Heng |url=https://www.google.com/books/edition/Fiscal_Policy_in_Dynamic_Economies/FadJDAAAQBAJ?hl=en&gbpv=1&dq=%22fiscal+policy%22+%22taxation%22+%22public+spending%22&pg=PA1&printsec=frontcover |title=Fiscal Policy in Dynamic Economies |date=2016-06-03 |publisher=Routledge |isbn=978-1-134-87005-9 |pages=1 |language=en}}</ref> *Monetary policy, where central bank interest rates influence the money supply.<ref>{{Cite book |last=Hossain |first=Akhand Akhtar |url=https://www.google.com/books/edition/Central_Banking_and_Monetary_Policy_in_t/8YLRhs8jwCsC?hl=en&gbpv=1&dq=%22monetary+policy%22+money+supply+interest+rates&pg=PA223&printsec=frontcover |title=Central Banking and Monetary Policy in the Asia-Pacific |date=2009-01-01 |publisher=Edward Elgar Publishing |isbn=978-1-84980-209-3 |pages=223 |language=en}}</ref> *Trade policy, which refers to tariffs, trade agreements, and the international institutions that govern them.<ref>{{Cite book |last=McGillivray |first=Fiona |url=https://www.google.com/books/edition/International_Trade_and_Political_Instit/zobB0CyO1TwC?hl=en&gbpv=1&dq=trade+policy+tariffs+trade+agreements+institutions&pg=PA47&printsec=frontcover |title=International Trade and Political Institutions: Instituting Trade in the Long Nineteenth Century |date=2001-01-01 |publisher=Edward Elgar Publishing |isbn=978-1-84376-732-9 |language=en}}</ref> *Development policy, promoting long-run economic growth, particularly in lower-income countries.<ref>{{Cite book |last=Mahmood |first=Moazam |url=https://www.google.com/books/edition/Explaining_Pakistan_s_Long_Run_Growth/6ttdEQAAQBAJ?hl=en&gbpv=1&dq=%22development%22+policy+%22long-run%22+%22growth%22+lower-income&pg=PA115&printsec=frontcover |title=Explaining Pakistan’s Long-Run Growth: A Keynesian Model in Seven Essays |last2=Ikram |first2=Rabia |date=2025-05-14 |publisher=Springer Nature |isbn=978-3-031-86677-7 |pages=115 |language=en}}</ref> *Policies dealing with the redistribution of income through taxes and transfers.<ref>{{Cite book |last=Rodríguez |first=Juan Gabriel |url=https://www.google.com/books/edition/Inequality_Redistribution_and_Mobility/j5wLEAAAQBAJ?hl=en&gbpv=1&dq=%22redistribution%22++%22taxes%22+%22transfers%22&pg=PT36&printsec=frontcover |title=Inequality, Redistribution and Mobility |last2=Bishop |first2=John A. |date=2020-11-26 |publisher=Emerald Group Publishing |isbn=978-1-80043-041-9 |language=en}}</ref> *Supply-side economics, affecting technology investment, labour markets, and regulatory policy.<ref>{{Cite book |last=Green |first=Simon |url=https://www.google.com/books/edition/Policy_Convergence_in_the_UK_and_Germany/yfLaAAAAQBAJ?hl=en&gbpv=1&dq=supply-side+policy+%22labour+market%22+regulation+technology&pg=PA124&printsec=frontcover |title=Policy Convergence in the UK and Germany: Beyond the Third Way? |date=2007-12-24 |publisher=Routledge |isbn=978-1-136-76707-4 |pages=124 |language=en}}</ref> Stabilization policy attempts to dampen the price and employment fluctuations of the business cycle. It includes both fiscal and monetary policies.<ref>{{Cite book |last=Langdana |first=Farrokh |url=https://www.google.com/books/edition/Sustaining_Domestic_Budget_Deficits_in_O/q-2IAgAAQBAJ?hl=en&gbpv=1&dq=%22stabilization%22+%22business+cycle%22+sustain+employment&pg=PA15&printsec=frontcover |title=Sustaining Domestic Budget Deficits in Open Economies |date=1989-12-07 |publisher=Routledge |isbn=978-1-134-95813-9 |pages=15 |language=en}}</ref>

==Policy goals and instruments== Economic policy is directed toward specific outcomes that policymakers seek to achieve.<ref>{{Cite book |last=Schram |first=Arthur |url=https://www.google.com/books/edition/Handbook_of_Research_Methods_and_Applica/uC2jDwAAQBAJ?hl=en&gbpv=1&dq=economic+policy+specific+goals+outcomes&pg=PA295&printsec=frontcover |title=Handbook of Research Methods and Applications in Experimental Economics |last2=Ule |first2=Aljaž |date=2019 |publisher=Edward Elgar Publishing |isbn=978-1-78811-056-3 |pages=295 |language=en}}</ref>

Goals include:<ref>{{Cite book |last=Roller |first=Edeltraud |url=https://www.google.com/books/edition/The_Performance_of_Democracies/EhJREAAAQBAJ?hl=en&gbpv=1&dq=%22economic+goal%22+%22stability%22+%22employment%22+growth&pg=PA40&printsec=frontcover |title=The Performance of Democracies: Political Institutions and Public Policy |date=2005-09-29 |publisher=OUP Oxford |isbn=978-0-19-153674-8 |pages=40 |language=en}}</ref>

* Full employment: minimizing involuntary unemployment. * Price stability: the range of goods one can acquire with their available financial resources. * Economic growth: steady and adequate growth in national income. * Balance of payments equilibrium: maintaining a stable exchange rate<ref>{{Cite book |last=Gibson |first=Heather D. |url=https://www.google.com/books/edition/Balance_of_Payments_Theory_and_the_Unite/XqC-DAAAQBAJ?hl=en&gbpv=1&dq=%22balance+of+payments+equilibrium%22+exchange+rate&pg=PA21&printsec=frontcover |title=Balance-of-Payments Theory and the United Kingdom Experience |last2=Thirlwall |first2=A. P. |date=2016-07-27 |publisher=Springer |isbn=978-1-349-21806-6 |pages=21 |language=en}}</ref> * Distributional equity: reducing inequality in incomes or wealth.<ref>{{Cite book |last=Wolf |first=Johannes |url=https://www.google.com/books/edition/Economic_Transformation/lCAMEQAAQBAJ?hl=en&gbpv=1&dq=%22economic+goal%22+distributional+%22equity%22+reduce+inequality&pg=PA38&printsec=frontcover |title=Economic Transformation: Designing a Contemporary Economy |date=2024-06-03 |publisher=Springer Nature |isbn=978-3-658-43732-9 |pages=38 |language=en}}</ref>

To pursue these goals, governments and central banks use policy instruments or tools including tariffs, tax rates, and regulatory standards.<ref>{{Cite book |last=Alareeni |first=Bahaaeddin |url=https://www.google.com/books/edition/Digitalisation_Opportunities_and_Challen/QRi2EAAAQBAJ?hl=en&gbpv=1&dq=economic+%22instruments%22++tariffs+exchange+rate+regulatory+standards&pg=PA297&printsec=frontcover |title=Digitalisation: Opportunities and Challenges for Business: Volume 2 |last2=Hamdan |first2=Allam |last3=Khamis |first3=Reem |last4=Khoury |first4=Rim El |date=2023-03-27 |publisher=Springer Nature |isbn=978-3-031-26956-1 |pages=297 |language=en}}</ref>

===Constraints and trade-offs=== thumb|Diagram shows the relationship between inflation and the unemployment rate, also called the Phillips Curve A fundamental challenge in economic policy is conflicting goals, such as the trade-offs among high economic growth, low unemployment, and low inflation.<ref name=":6">{{Cite book |last=Sakamoto |first=Takayuki |url=https://www.google.com/books/edition/Economic_Policy_and_Performance_in_Indus/QnyTAgAAQBAJ?hl=en&gbpv=1&dq=%22economic+policy%22+goals+%22conflict%22+inflation+unemployment&pg=PA18&printsec=frontcover |title=Economic Policy and Performance in Industrial Democracies: Party Governments, Central Banks and the Fiscal-Monetary Policy Mix |date=2008-01-31 |publisher=Routledge |isbn=978-1-135-97638-5 |pages=18 |language=en}}</ref> Though the Phillips curve's trade-off between inflation and unemployment is unstable over the long run,<ref>{{Cite book |last=Hossain |first=Akhand Akhtar |url=https://www.google.com/books/edition/Central_Banking_and_Monetary_Policy_in_t/8YLRhs8jwCsC?hl=en&gbpv=1&dq=Phillips+curve+unstable+long+run+trade-offs+central&pg=PA83&printsec=frontcover |title=Central Banking and Monetary Policy in the Asia-Pacific |date=2009-01-01 |publisher=Edward Elgar Publishing |isbn=978-1-84980-209-3 |pages=83 |language=en}}</ref> trade-offs between policy decisions remain a central concern.<ref>{{Cite book |last=Stiglitz |first=Joseph E. |url=https://www.google.com/books/edition/Joseph_Stiglitz_and_the_World_Bank/XoIIfHk7eQUC?hl=en&gbpv=1&dq=economic+policy+trade-offs+%22concern%22&pg=PA109&printsec=frontcover |title=Joseph Stiglitz and the World Bank: The Rebel Within |date=2001 |publisher=Anthem Press |isbn=978-1-898855-53-8 |pages=109 |language=en}}</ref>

===Demand-side vs. supply-side tools===

Macroeconomic stabilization has traditionally relied on demand-side tools that influence aggregate demand.<ref>{{Cite book |last=Canada |first=Canada Status of Women |url=https://www.google.com/books/edition/Papers_on_Economic_Equality/Ceikgc-i6rYC?hl=en&gbpv=1&bsq=macroeconomic+stabilization+traditionally+demand-side+aggregate+demand&dq=macroeconomic+stabilization+traditionally+demand-side+aggregate+demand&printsec=frontcover |title=Papers on Economic Equality |date=1994 |publisher=Status of Women Canada |pages=16 |language=en}}</ref><ref>{{Cite book |last=Free |first=Rhona C. |url=https://www.google.com/books/edition/21st_Century_Economics_A_Reference_Handb/nQBzAwAAQBAJ?hl=en&gbpv=1&dq=stabilization+demand-side+aggregate+demand+tradition&pg=PA329&printsec=frontcover |title=21st Century Economics: A Reference Handbook |date=2010-05-14 |publisher=SAGE Publications |isbn=978-1-4522-6631-2 |pages=329 |language=en}}</ref> Without accompanying supply-side reforms, such as unemployment insurance, job protection legislation or labour-market regulations, monetary expansion will likely only cause wage and price increases.<ref>{{Cite book |last=Calmfors |first=Lars |url=https://www.google.com/books/edition/EMU_A_Swedish_Perspective/vKHzBwAAQBAJ?hl=en&gbpv=1&dq=supply-side+reform+labour+market+regulations+competition+policy&pg=PA323&printsec=frontcover |title=EMU — A Swedish Perspective |last2=Flam |first2=Harry |last3=Gottfries |first3=Nils |last4=Matlary |first4=Janne Haaland |last5=Jerneck |first5=Magnus |last6=Lindahl |first6=Rutger |last7=Berntsson |first7=Christina Nordh |last8=Rabinowitz |first8=Ewa |last9=Vredin |first9=A. |date=2012-12-06 |publisher=Springer Science & Business Media |isbn=978-1-4615-6183-5 |pages=323 |language=en}}</ref>

==Discretionary policy vs policy rules== A long-running debate concerns whether policy should be based on rules or discretionary.<ref>{{Cite book |last=Goodin |first=Robert E. |url=https://www.google.com/books/edition/A_New_Handbook_of_Political_Science/-iWQDwAAQBAJ?hl=en&gbpv=1&dq=long-running+debate+policy+discretionary+or+pre-committed+rules&pg=PA614&printsec=frontcover |title=A New Handbook of Political Science |last2=Klingemann |first2=Hans-Dieter |date=1996-09-19 |publisher=OUP Oxford |isbn=978-0-19-152108-9 |pages=614 |language=en}}</ref> Discretionary policy allows for flexible response to unforeseen developments, but may suffer from dynamic inconsistency. If policymakers announce one policy but do another, the public may anticipate reversals, making policy less effective.<ref name=":8">{{Cite book |last=Houben |first=Aerdt C. F. J. |url=https://www.google.com/books/edition/The_Evolution_of_Monetary_Policy_Strateg/QonkBwAAQBAJ?hl=en&gbpv=1&dq=discretionary+policy+flexible+dynamic+inconsistency&pg=PA38&printsec=frontcover |title=The Evolution of Monetary Policy Strategies in Europe |date=2012-12-06 |publisher=Springer Science & Business Media |isbn=978-1-4615-4471-5 |pages=38-9 |language=en}}</ref><ref>{{Cite book |last=Noman |first=Akbar |url=https://www.google.com/books/edition/Good_Growth_and_Governance_in_Africa/5cnCtkFi7EUC?hl=en&gbpv=1&dq=policy+reversal+discretion+inconsistent&pg=PA84&printsec=frontcover |title=Good Growth and Governance in Africa: Rethinking Development Strategies |date=2012 |publisher=OUP Oxford |isbn=978-0-19-969856-1 |pages=84 |language=en}}</ref>

Rule-based policies improve credibility with more predictable central bank behavior.<ref>{{Cite book |last=Langhammer |first=Rolf J. |url=https://www.google.com/books/edition/Monetary_Policy_and_Macroeconomic_Stabil/FwOfTleoT4IC?hl=en&gbpv=1&dq=%22rule-based%22+policies+credibility+predictable%22&pg=PA209&printsec=frontcover |title=Monetary Policy and Macroeconomic Stabilization in Latin America |last2=Souza |first2=Lúcio Vinhas de |date=2007-08-07 |publisher=Springer Science & Business Media |isbn=978-3-540-28201-3 |language=en}}</ref>

* Fixed exchange rate regimes: maintaining a fixed rate against a reserve currency.<ref>{{Cite book |last=Zenker |first=Anja |url=https://www.google.com/books/edition/Currency_Speculation_in_Fixed_Exchange_R/b1q6BAAAQBAJ?hl=en&gbpv=1&dq=%22fixed+exchange+rate%22+currency+value&pg=PA13&printsec=frontcover |title=Currency Speculation in Fixed Exchange Rate Regimes: Theory and Empirical Evidence |date=2014-01-08 |publisher=Springer Science & Business Media |isbn=978-3-658-04829-7 |pages=13 |language=en}}</ref> * Inflation targeting: keeping inflation within a band.<ref>{{Cite book |last=Niedźwiedzińska |first=Joanna |url=https://www.google.com/books/edition/Inflation_Targeting_and_Central_Banks/bt4zEAAAQBAJ?hl=en&gbpv=1&dq=%22inflation+targeting%22+specified+band&pg=PT29&printsec=frontcover |title=Inflation Targeting and Central Banks: Institutional Set-ups and Monetary Policy Effectiveness |date=2021-07-28 |publisher=Routledge |isbn=978-1-000-42264-1 |language=en}}</ref> * Fiscal rules: constitutional or statutory constraints on deficits or debts such as a balanced budget law.<ref>{{Cite book |last=Hallerberg |first=Mark |url=https://www.google.com/books/edition/Fiscal_Governance_in_Europe/vctdb-8Gr1sC?hl=en&gbpv=1&dq=%22fiscal+rules%22+constraints+deficits+debt+balanced-budget+requirements&pg=PA17&printsec=frontcover |title=Fiscal Governance in Europe |last2=Strauch |first2=Rolf Rainer |last3=Hagen |first3=Jürgen von |date=2009-03-16 |publisher=Cambridge University Press |isbn=978-0-521-85746-8 |pages=17 |language=en}}</ref> * Golden Rule: allowing debt only to finance investment.<ref>{{Cite book |last=Geissler |first=René |url=https://www.google.com/books/edition/Local_Public_Finance/Y5YqEAAAQBAJ?hl=en&gbpv=1&dq=Golden+Rule+public+finance+borrowing+invest+expenditure&pg=PA36&printsec=frontcover |title=Local Public Finance: An International Comparative Regulatory Perspective |last2=Hammerschmid |first2=Gerhard |last3=Raffer |first3=Christian |date=2021-04-20 |publisher=Springer Nature |isbn=978-3-030-67466-3 |pages=36 |language=en}}</ref>

Discretion may be delegated to an independent central bank with a mandate. The central bank then faces a trade-off between discretion and credibility.<ref>{{Cite book |last=Lippi |first=Francesco |url=https://www.google.com/books/edition/Central_Bank_Independence_Targets_and_Cr/tzNR5gy0504C?hl=en&gbpv=1&dq=discretion+%22mandate%22+flexible+credible+central+bank&pg=PA17&printsec=frontcover |title=Central Bank Independence, Targets, and Credibility: Political and Economic Aspects of Delegation Arrangements for Monetary Policy |date=1999-01-27 |publisher=Edward Elgar Publishing |isbn=978-1-78254-297-1 |pages=17 |language=en}}</ref>

==History of economic policy== {{main|Economic history}} ===Ancient and medieval periods=== Ancient governments covered expenditures by levying forms of taxation such as corvée forced labour.<ref>{{cite book |last1=Burg |first1=David F. |title=A World History of Tax Rebellions: An Encyclopedia of Tax Rebels, Revolts, and Riots from Antiquity to the Present |date=1 June 2004 |publisher=Routledge |isbn=978-1-135-95999-9 |url=https://www.google.com/books/edition/A_World_History_of_Tax_Rebellions/LrvxuLs101cC?hl=en&gbpv=1&dq=ancient+Mesopotamia+government+corvee&pg=PT9&printsec=frontcover |language=en}}</ref> Egyptian grain taxes paid workers conscripted to build temples and pyramids.<ref>{{cite book |last1=Silverman |first1=David P. |title=Ancient Egypt |date=2003 |publisher=Oxford University Press |isbn=978-0-19-521952-4 |url=https://www.google.com/books/edition/Ancient_Egypt/x7p_QMIjESwC?hl=en&gbpv=1&dq=ancient+Egypt+grain+taxation+granaries+pyramids&pg=PA66&printsec=frontcover |language=en|pages=66}}</ref>

With the development of coins, rulers could also raise revenue through debasement, reducing precious metal content of coins.<ref>{{Cite book |last=Rössner |first=Philipp Robinson |url=https://www.google.com/books/edition/Managing_the_Wealth_of_Nations/qmO1EAAAQBAJ?hl=en&gbpv=1&dq=coins+rulers+revenue+tax+debasement&pg=PA111&printsec=frontcover |title=Managing the Wealth of Nations: Political Economies of Change in Preindustrial Europe |date=2023-03-27 |publisher=Policy Press |isbn=978-1-5292-1122-1 |pages=111 |language=en}}</ref><ref>{{Cite book |last=Lipsey |first=Richard |url=https://www.google.com/books/edition/Economics/hFVlNEC6AkUC?hl=en&gbpv=1&dq=coins+rulers+raise+%22revenue%22+%22debasement%22&pg=PA450&printsec=frontcover |title=Economics |last2=Chrystal |first2=Alec |date=2011-03-24 |publisher=OUP Oxford |isbn=978-0-19-956338-8 |pages=450 |language=en}}</ref> Typically inflation followed debasement as people demanded more coins for the same amount of goods.<ref>{{Cite book |last=Dyson |first=Kenneth |url=https://www.google.com/books/edition/States_Debt_and_Power/UwrVAwAAQBAJ?hl=en&gbpv=1&dq=debasement+inflationary+finance+lose+credibility&pg=PA312&printsec=frontcover |title=States, Debt, and Power: 'Saints' and 'Sinners' in European History and Integration |date=2014-06-19 |publisher=OUP Oxford |isbn=978-0-19-102347-7 |pages=312 |language=en}}</ref> Ptolemaic Egypt imposed a monetary monopoly, profiting from foreign coinage exchanged for local currency with an indirect protective tariff.<ref>{{Cite book |last=Russell |first=Thomas James |url=https://www.google.com/books/edition/Byzantium_and_the_Bosporus/ZD1uDQAAQBAJ?hl=en&gbpv=1&dq=Ptolemaic+Egypt+local+coinage+tariff&pg=PA130&printsec=frontcover |title=Byzantium and the Bosporus: A Historical Study, from the Seventh Century BC Until the Foundation of Constantinople |date=2017 |publisher=Oxford University Press |isbn=978-0-19-879052-5 |pages=130 |language=en}}</ref>

=== Mercantilism and early modern policy === From the seventeenth to mid nineteenth century, mercantilism was the dominant European economic policy, aiming to build wealth by imposing high tariffs on manufactured imports.<ref>{{Cite book |last=Andreas |first=Pickel |url=https://www.google.com/books/edition/Handbook_of_Economic_Nationalism/uW-VEAAAQBAJ?hl=en&gbpv=1&dq=century+dominant+European+mercantilism&pg=PA2&printsec=frontcover |title=Handbook of Economic Nationalism |date=2022-10-13 |publisher=Edward Elgar Publishing |isbn=978-1-78990-904-3 |pages=2 |language=en}}</ref> Beginning in 1651, the English Navigation Acts restricted shipping from the colonies except on English vessels.<ref>{{Cite book |last=Clark |first=Cynthia |url=https://www.google.com/books/edition/The_American_Economy/TE7eEAAAQBAJ?hl=en&gbpv=1&dq=English+Navigation+Acts+1651+goods+colony+ships&pg=PA316&printsec=frontcover |title=The American Economy: A Historical Encyclopedia [2 volumes] |date=2011-03-11 |publisher=Bloomsbury Publishing USA |isbn=978-1-59884-462-7 |pages=316 |language=en}}</ref>

Mercantilist thought was challenged by the classical economists.<ref name=":1">{{Cite book |last=Spencer |first=David A. |url=https://www.google.com/books/edition/Making_Light_Work/aypaEAAAQBAJ?hl=en&gbpv=1&dq=Mercantilist+challenged+classical+economists&pg=PT15&printsec=frontcover |title=Making Light Work: An End to Toil in the Twenty-First Century |date=2022-01-19 |publisher=John Wiley & Sons |isbn=978-1-5095-4864-4 |language=en}}</ref> Adam Smith in The Wealth of Nations argued that nations benefit from trade and specialization, with David Ricardo introducing comparative advantage, constituting pillars of classic free trade theory.<ref>{{Cite book |last=Alessandrini |first=Donatella |url=https://www.google.com/books/edition/Developing_Countries_and_the_Multilatera/GA_cBAAAQBAJ?hl=en&gbpv=1&dq=%22Wealth+of+Nations%22+free+trade+specialisation+comparative+advantage&pg=PA222&printsec=frontcover |title=Developing Countries and the Multilateral Trade Regime: The Failure and Promise of the WTO's Development Mission |date=2010-08-10 |publisher=Bloomsbury Publishing |isbn=978-1-84731-592-2 |pages=222 |language=en}}</ref>

=== Gold standard === thumb|Gold ingot and bar on display at the Banque de France, Paris, European Heritage Days, September 2022 In the 19th century, monetary standards came to the foreground of policy issues.<ref>{{Cite book |last=Baltensperger |first=Ernst |url=https://www.google.com/books/edition/Swiss_Monetary_History_since_the_Early_1/4hssDwAAQBAJ?hl=en&gbpv=1&dq=19th+%22century%22+%22monetary+standards%22+central+policy&pg=PA86&printsec=frontcover |title=Swiss Monetary History since the Early 19th Century |last2=Kugler |first2=Peter |date=2017-08-03 |publisher=Cambridge University Press |isbn=978-1-108-19144-9 |pages=86 |language=en}}</ref> The bimetallic debate over whether silver as well as gold should back currency had distributional effects.<ref>{{Cite book |last=Parker |first=Randall |url=https://www.google.com/books/edition/Routledge_Handbook_of_Major_Events_in_Ec/9ydqHszxqEEC?hl=en&gbpv=1&dq=%22bimetallic%22+debate+distributional&pg=PA29&printsec=frontcover |title=Routledge Handbook of Major Events in Economic History |last2=Whaples |first2=Robert |date=2013-02-11 |publisher=Routledge |isbn=978-1-135-08079-2 |pages=29 |language=en}}</ref>

Britain adopted the gold standard in 1816, with a gradual transition of more countries that culminated in the classical gold standard era of 1870–1914.<ref>{{Cite book |last=Denzel |first=Markus A. |url=https://www.google.com/books/edition/Handbook_of_World_Exchange_Rates_1590_19/8XBBDgAAQBAJ?hl=en&gbpv=1&dq=Britain+gold+standard+1816+1870+international&pg=PT62&printsec=frontcover |title=Handbook of World Exchange Rates, 1590–1914 |date=2017-03-02 |publisher=Routledge |isbn=978-1-351-93172-4 |language=en}}</ref> The gold standard tightly constrained economic policy discretion, with gold flows creating pressure on prices and wages that were automatic in theory.<ref>{{Cite book |last=Kettell |first=S. |url=https://www.google.com/books/edition/The_Political_Economy_of_Exchange_Rate_P/dVyIDAAAQBAJ?hl=en&gbpv=1&dq=%22gold+standard%22+price+policy&pg=PA34&printsec=frontcover |title=The Political Economy of Exchange Rate Policy-Making: From the Gold Standard to the Euro |date=2004-05-28 |publisher=Springer |isbn=978-0-230-50352-6 |pages=34 |language=en}}</ref> This system provided exchange rate stability but limited the ability to fight recessions.<ref>{{Cite book |last=Parker |first=Randall |url=https://www.google.com/books/edition/Routledge_Handbook_of_Major_Events_in_Ec/9ydqHszxqEEC?hl=en&gbpv=1&dq=%22gold+standard%22+exchange+rate+stability+recession&pg=PA97&printsec=frontcover |title=Routledge Handbook of Major Events in Economic History |last2=Whaples |first2=Robert |date=2013-02-11 |publisher=Routledge |isbn=978-1-135-08079-2 |pages=97 |language=en}}</ref>

===The Keynesian era=== thumb|Portrait of John Maynard Keynes sitting down while holding a book The Great Depression and World War II reshaped economic policymaking.<ref>{{Cite book |last=Woolcock |first=Stephen |url=https://www.google.com/books/edition/The_New_Economic_Diplomacy/2uNOEQAAQBAJ?hl=en&gbpv=1&dq=%22Great+Depression%22+reshaped+%22economic+policymaking%22&pg=RA1-PT103&printsec=frontcover |title=The New Economic Diplomacy: Decision-Making and Negotiation in International Economic Relations |date=2025-04-29 |publisher=Taylor & Francis |isbn=978-1-040-34335-7 |language=en}}</ref> The Great Depression thoroughly undermined the perspective that automatic market adjustments would quickly solve recessions, and showed deflation can be ruinous for the economy.<ref name=":2">{{Cite book |last=Schneider |first=Geoffrey |url=https://www.google.com/books/edition/Macroeconomic_Principles_and_Problems/cm4IEQAAQBAJ?hl=en&gbpv=1&dq=%22Great+Depression%22+undermined+confidence+self-correcting&pg=PA181&printsec=frontcover |title=Macroeconomic Principles and Problems: A Pluralist Introduction |date=2022-09-29 |publisher=Taylor & Francis |isbn=978-0-429-67886-8 |pages=181 |language=en}}</ref> John Maynard Keynes's The General Theory of Employment, Interest and Money (1936) provided theoretical justification for active fiscal policy, with governments taking action to create full employment.<ref>{{Cite book |last=Odekon |first=Mehmet |url=https://www.google.com/books/edition/Booms_and_Busts_An_Encyclopedia_of_Econo/q_FnBwAAQBAJ?hl=en&gbpv=1&dq=Keynes+%22active+fiscal+policy%22&pg=PA274&printsec=frontcover |title=Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis |date=2015-03-17 |publisher=Routledge |isbn=978-1-317-47576-7 |pages=274 |language=en}}</ref>

In the postwar period, Keynesian demand management became the dominant policy paradigm.<ref>{{Cite book |last=Wattel |url=https://www.google.com/books/edition/The_Policy_Consequences_of_John_Maynard/JyEvDwAAQBAJ?hl=en&gbpv=1&dq=postwar+Keynesian+demand+management+dominant+policy&pg=PT250&printsec=frontcover |title=The Policy Consequences of John Maynard Keynes |last2=Wattel |first2=Harold L. |date=2017-07-28 |publisher=Routledge |isbn=978-1-315-49523-1 |language=en}}</ref> The Bretton Woods system (1944–1971) managed exchange rates, with currencies fixed in value to the US dollar, itself convertible to gold at a fixed price.<ref>{{Cite book |last=Bordo |first=Michael D. |url=https://www.google.com/books/edition/A_Retrospective_on_the_Bretton_Woods_Sys/8sZMXzZPr4gC?hl=en&gbpv=1&dq=exchange+rates+%22Bretton+Woods%22&pg=PA515&printsec=frontcover |title=A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform |last2=Eichengreen |first2=Barry |date=2007-12-01 |publisher=University of Chicago Press |isbn=978-0-226-06690-5 |pages=515 |language=en}}</ref>

=== Stagflation and monetarism === The stagflation of the 1970s saw both unemployment and inflation rise, confounding Keynesian economists and prompting a rethinking of economic policy.<ref name=":3">{{Cite book |last=Schneider |first=Geoffrey |url=https://www.google.com/books/edition/Macroeconomic_Principles_and_Problems/09KCEAAAQBAJ?hl=en&gbpv=1&dq=stagflation+1970s+economic+rethinking&pg=PT167&printsec=frontcover |title=Macroeconomic Principles and Problems: A Pluralist Introduction |date=2022-09-29 |publisher=Taylor & Francis |isbn=978-0-429-67885-1 |language=en}}</ref> In the monetarist school, Milton Friedman argued that the unemployment-inflation trade-off of the Phillips curve does not hold and that government intervention could lead to economic destabilization.<ref>{{Cite book |last=Titumir |first=Rashed Al Mahmud |url=https://www.google.com/books/edition/Fiscal_and_Monetary_Policies_in_Developi/gh-NEQAAQBAJ?hl=en&gbpv=1&dq=%22Friedman%22+activist+policy+%22destabilise%22&pg=PT55&printsec=frontcover |title=Fiscal and Monetary Policies in Developing Countries: State, Citizenship and Transformation |date=2021-12-23 |publisher=Taylor & Francis |isbn=978-1-000-51130-7 |language=en}}</ref>

Many central banks prioritize inflation control over employment targets.<ref>{{Cite book |last=Langdana |first=Farrokh K. |url=https://www.google.com/books/edition/Macroeconomic_Policy/H4t_Ufbqo08C?hl=en&gbpv=1&dq=Friedman+policy+%22inflation+control%22+over+%22employment%22+targets&pg=PA264&printsec=frontcover |title=Macroeconomic Policy: Demystifying Monetary and Fiscal Policy |date=2002 |publisher=Springer Science & Business Media |isbn=978-1-4020-7146-1 |pages=264 |language=en}}</ref> Central bank independence and explicit inflation targets became widespread from the 1990s onward.<ref name=":4">{{Cite book |last=Papadia |first=F. |url=https://www.google.com/books/edition/Central_Banking_in_Turbulent_Times/c2pNDwAAQBAJ?hl=en&gbpv=1&dq=central+bank+independence+explicit+inflation+targets+1990s&pg=PA38&printsec=frontcover |title=Central Banking in Turbulent Times |last2=Välimäki |first2=Tuomas |date=2018 |publisher=Oxford University Press |isbn=978-0-19-880619-6 |pages=38 |language=en}}</ref>

=== The 2008 financial crisis and renewed interventionism === The 2008 financial crisis and Great Recession prompted another shift in economic policymaking.<ref name=":5">{{Cite book |last=Clift |first=Ben |url=https://www.google.com/books/edition/The_IMF_and_the_Politics_of_Austerity_in/7yJLDwAAQBAJ?hl=en&gbpv=1&dq=2008+Great+Recession+rethink+%22economic+policymaking%22&pg=PA99&printsec=frontcover |title=The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis |date=2018 |publisher=Oxford University Press |isbn=978-0-19-881308-8 |pages=99 |language=en}}</ref> Confronted with a severe economic crisis, governments worldwide responded with massive stimulus, bailouts, Zero interest-rate policy, and quantitative easing.<ref>{{Cite book |last=Karagiannis |first=Nikolaos |url=https://www.google.com/books/edition/The_US_Economy_and_Neoliberalism/xSRY1GqdkqkC?hl=en&gbpv=1&dq=2008+severe+stimulus+bailouts+quantitative+easing&pg=PA186&printsec=frontcover |title=The US Economy and Neoliberalism: Alternative Strategies and Policies |last2=Madjd-Sadjadi |first2=Zagros |last3=Sen |first3=Swapan |date=2013 |publisher=Routledge |isbn=978-0-415-64505-8 |pages=186 |language=en}}</ref> Such responses rediscovered Keynesian intervention and prompted regulatory reform.<ref>{{Cite book |last=Hira |first=Anil |url=https://www.google.com/books/edition/The_Failure_of_Financial_Regulation/PsiSDwAAQBAJ?hl=en&gbpv=1&dq=2008+interventionist+Keynesian+regulation&pg=PA58&printsec=frontcover |title=The Failure of Financial Regulation: Why a Major Crisis Could Happen Again |last2=Gaillard |first2=Norbert |last3=Cohn |first3=Theodore H. |date=2019-04-16 |publisher=Springer |isbn=978-3-030-05680-3 |pages=58 |language=en}}</ref>

Subsequent debates included the pace of fiscal consolidation,<ref>{{Cite book |last=Clift |first=Ben |url=https://www.google.com/books/edition/The_IMF_and_the_Politics_of_Austerity_in/kz5MDwAAQBAJ?hl=en&gbpv=1&dq=debate+fiscal+consolidation+pace+timing&pg=PT126&printsec=frontcover |title=The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis |date=2018-02-14 |publisher=Oxford University Press |isbn=978-0-19-254248-9 |language=en}}</ref> quantitative easing's distributional consequences, and the risks when interest rates approach the lower bound.<ref>{{Cite book |last=Kokores |first=Ioanna T. |url=https://www.google.com/books/edition/Monetary_Policy_in_Interdependent_Econom/kyTbEAAAQBAJ?hl=en&gbpv=1&dq=distributional+consequences+quantitative+easing+limits+effective+lower+bound&pg=PA9&printsec=frontcover |title=Monetary Policy in Interdependent Economies: The Task Ahead |date=2023-10-04 |publisher=Springer Nature |isbn=978-3-031-41958-4 |pages=9 |language=en}}</ref> The COVID-19 pandemic of 2020 prompted a gargantuan fiscal response, with income transfers, wage subsidies, and a massive rise in public debt.<ref>{{Cite book |last=Boubaker |first=Sabri |url=https://www.google.com/books/edition/Financial_Transformations_Beyond_The_Cov/62F2EAAAQBAJ?hl=en&gbpv=1&dq=COVID+larger+fiscal+response+direct+income+transfers+business+support+public+debt&pg=PA46&printsec=frontcover |title=Financial Transformations Beyond The Covid-19 Health Crisis |last2=Nguyen |first2=Duc Khuong |date=2022-05-18 |publisher=World Scientific |isbn=978-1-80061-079-8 |pages=46 |language=en}}</ref>

== Evidence-based policy == Evidence-based policy assesses whether causal hypotheses are supported by the best available evidence, rather than theory-based orthodoxy in current economics.<ref>{{Cite book |last=Fiorito |first=Luca |url=https://www.google.com/books/edition/Including_a_Symposium_on_Bruce_Caldwell/fDVZDwAAQBAJ?hl=en&gbpv=1&dq=evidence+based+policy+Banerjee+economics&pg=PA108&printsec=frontcover |title=Including a Symposium on Bruce Caldwell's Beyond Positivism after 35 Years |last2=Scheall |first2=Scott |last3=Suprinyak |first3=Carlos Eduardo |date=2018-05-18 |publisher=Emerald Group Publishing |isbn=978-1-78756-126-7 |pages=108 |language=en}}</ref> The 2019 Nobel Prize in Economics was awarded to Abhijit Banerjee, Esther Duflo, and Michael Kremer for their use of field experiments to study the effectiveness of interventions.<ref>{{Cite news|last=Wearden|first=Graeme|url=https://www.theguardian.com/business/live/2019/oct/14/nobel-prize-in-economic-sciences-2019-sveriges-riksbank-live-updates|title=Nobel Prize in Economics won by Banerjee, Duflo and Kremer for fighting poverty - live updates|date=2019-10-14|work=The Guardian|access-date=2020-04-07|language=en-GB|issn=0261-3077}}</ref> Carefully designed experiments such as randomized controlled trials can bring increased rigor to poverty alleviation.<ref>{{Cite book |last=Morris |first=Shad |url=https://www.google.com/books/edition/International_Business_International_Ada/CMi8EAAAQBAJ?hl=en&gbpv=1&dq=%22Duflo%22+experiment+design+developing+countries+rigor&pg=PA220&printsec=frontcover |title=International Business, International Adaptation |last2=Oldroyd |first2=James |date=2023-09-20 |publisher=John Wiley & Sons |isbn=978-1-119-88972-4 |pages=220 |language=en}}</ref>

However, the emphasis put on experimental evidence by the movement of evidence-based policy (and evidence-based medicine) results from the narrowly construed notion of intervention, which encompasses only policy decisions concerned with policymaking aimed at modifying causes to influence effects. In contrast to this idealized view of evidence-based policy movement, economic policymaking is a broader term that includes also institutional reforms and actions that do not require causal claims to be neutral under interventions. Such policy decisions can be grounded in, respectively, mechanistic evidence and correlational (econometric) studies.<ref>{{Cite book|last=Maziarz|first=Mariusz|title=The Philosophy of Causality in Economics: Causal Inferences and Policy Proposals|publisher=Routledge|year=2020|location=London & New York}}</ref>

== International dimensions ==

=== International institutions === thumb|IMF Headquarters, Washington, DC. The International Monetary Fund and World Bank were established at the 1944 Bretton Woods conference to assist in reconstruction after World War II.<ref>{{Cite book |last=Coppolaro |first=Lucia |url=https://www.google.com/books/edition/The_International_Monetary_Fund_and_the/PhvSEQAAQBAJ?hl=en&gbpv=1&dq=%22International+Monetary+Fund%22+%22World+Bank%22+established+1944&pg=PT74&printsec=frontcover |title=The International Monetary Fund and the World Bank in Southern Europe: Policy, Economy and Institutional Transformation, 1950s-1980s |last2=Petrini |first2=Francesco |last3=Tedoldi |first3=Leonida |date=2026-06-09 |publisher=Taylor & Francis |isbn=978-1-040-75346-0 |language=en}}</ref> The IMF provides short-term lending to countries with balance of payments difficulties, typically with conditionality requiring currency devaluation and restrictions on government expenditure and the money supply.<ref>{{Cite book |last=Thirlwall |first=A. P. |url=https://www.google.com/books/edition/Economics_of_Development/j_dGEAAAQBAJ?hl=en&gbpv=1&dq=IMF+short-term+lending+%22balance-of-payments%22+difficulties+conditionality&pg=PA556&printsec=frontcover |title=Economics of Development: Theory and Evidence |last2=Pacheco-López |first2=Penélope |date=2017-09-16 |publisher=Bloomsbury Publishing |isbn=978-1-350-30613-4 |pages=556 |language=en}}</ref> Critics argue that austerity translates into enormous suffering for millions, while proponents argue conditionalities are designed to stabilize economies.<ref name=":0">{{Cite book |last=Ghosh |first=Peu |url=https://www.google.com/books/edition/International_Political_Economy/mX0IEQAAQBAJ?hl=en&gbpv=1&dq=IMF+critics+conditionality+excessive+%22austerity%22+%22necessary%22&pg=PA151&printsec=frontcover |title=International Political Economy: Contexts, Issues and Challenges |date=2023-12-01 |publisher=Taylor & Francis |isbn=978-1-003-81348-4 |pages=151 |language=en}}</ref>

The World Trade Organization provides a rules-based multilateral framework for trade policy,<ref>{{Cite book |last=Kireyev |first=Alexei |url=https://www.google.com/books/edition/Trade_Multilateralism_in_the_Twenty_Firs/310yDwAAQBAJ?hl=en&gbpv=1&dq=World+Trade+Organization+rules-based+multilateral+framework&pg=PA1&printsec=frontcover |title=Trade Multilateralism in the Twenty-First Century: Building the Upper Floors of the Trading System Through WTO Accessions |last2=Osakwe |first2=Chiedu |date=2017-12-14 |publisher=Cambridge University Press |isbn=978-1-108-42128-7 |pages=1 |language=en}}</ref> discouraging arbitrary tariff increases and addressing broader issues including technical standards, subsidies, and state-owned enterprises.<ref>{{Cite book |last=Dygas |first=Robert |url=https://www.google.com/books/edition/The_Great_Convergence_and_the_World_Syst/YByBEQAAQBAJ?hl=en&gbpv=1&dq=WTO+restrict+%22arbitrary+tariff%22&pg=PA14&printsec=frontcover |title=The Great Convergence and the World System Reconfiguration: Toward a New World Order |date=2025-08-25 |publisher=Springer Nature |isbn=978-3-031-95830-4 |pages=14 |language=en}}</ref> The European Union's Stability and Growth Pact constrains national budgetary deficits and centralizes monetary power.<ref>{{Cite book |last=Shaw |first=Josephine |url=https://www.google.com/books/edition/The_Economic_and_Social_Law_of_the_Europ/mJRKEAAAQBAJ?hl=en&gbpv=1&dq=%22European+Union%22+%22Stability+and+Growth+Pact%22+monetary+autonomy&pg=PA193&printsec=frontcover |title=The Economic and Social Law of the European Union |last2=Hunt |first2=Jo |last3=Wallace |first3=Chloe |date=2017-09-16 |publisher=Bloomsbury Publishing |isbn=978-1-137-08070-7 |pages=193 |language=en}}</ref>

=== Policy spillovers and coordination === Economic policy can create strong spillovers for other countries. A devaluation shifts demand from foreign goods, incentivizing competitive devaluations.<ref>{{Cite book |last=Hallett |first=Andrew J. Hughes |url=https://www.google.com/books/edition/Challenges_for_Economic_Policy_Coordinat/RYfjBwAAQBAJ?hl=en&gbpv=1&dq=economic+policy+spillover&pg=PA26&printsec=frontcover |title=Challenges for Economic Policy Coordination within European Monetary Union |last2=Mooslechner |first2=Peter |last3=Schürz |first3=Martin |date=2013-06-29 |publisher=Springer Science & Business Media |isbn=978-1-4757-4738-6 |pages=26 |language=en}}</ref> Conversely, expansionary fiscal policy increases imports and affects trading partners.<ref>{{Cite book |last=Steinherr |first=Alfred |url=https://www.google.com/books/edition/Evolution_of_the_International_and_Regio/NlmwCwAAQBAJ?hl=en&gbpv=1&dq=expansionary+fiscal+policy+boost+imports+benefiting+trading+partners&pg=PA29&printsec=frontcover |title=Evolution of the International and Regional Monetary Systems: Essays in Honour of Robert Triffin |last2=Weiserbs |first2=Daniel |date=1991-12-12 |publisher=Springer |isbn=978-1-349-11061-2 |pages=29 |language=en}}</ref> Spillovers show the need for international policy coordination, though sustaining it is difficult in practice.<ref>{{Cite book |last=Bhandari |first=Jagdeep S. |url=https://www.google.com/books/edition/Economic_Dimensions_in_International_Law/YLeE3IbQr4MC?hl=en&gbpv=1&dq=spillovers+international+policy+coordination+difficult&pg=PA270&printsec=frontcover |title=Economic Dimensions in International Law: Comparative and Empirical Perspectives |last2=Sykes |first2=Alan O. |date=1997 |publisher=Cambridge University Press |isbn=978-0-521-57898-1 |pages=270 |language=en}}</ref>

==See also== {{Portal|Economy}} *Fiscal policy *Budget process *Constitutional economics *Energy policy *Job guarantee *Social policy *Stabilization policy

== References == {{reflist}}

==Further reading== * {{cite book |last1=Friedman |first1=Milton |last2=Schwartz |first2=Anna Jacobson |title=A monetary history of the United States 1867-1960 |date=2008 |publisher=Princeton University Press |location=Princeton |isbn=978-0-691-00354-2 |edition=9th pbk. printing, 22nd printing}} * {{cite book |last1=Keynes |first1=John Maynard |title=The General Theory of Employment, Interest and Money. |date=1936 |publisher=Macmillan}} * {{cite book |last1=Reinhart |first1=Carmen M. |last2=Rogoff |first2=Kenneth S. |title=This time is different: eight centuries of financial folly |date=2011 |publisher=Princeton University Press |location=Princeton, New Jersey |isbn=978-0-691-15264-6}} * {{cite book |title=Advice and Dissent: Why America Suffers When Economics and Politics Collide |author=Alan S. Blinder |publisher=Basic Books |year=2018 |isbn=978-0465094172}} * {{cite book |last1=Reinhart |first1=Carmen M. |last2=Rogoff |first2=Kenneth S. |title=This time is different: eight centuries of financial folly |date=2011 |publisher=Princeton Univ. Press |location=Princeton, NJ |isbn=9781586487980 |edition=First paperback print}}

{{Public policy}}

{{Authority control}} Category:Economic policy