Policy advice

It’s important to recognise that monetary and fiscal policy are linked. According to Peter Boettke we can summarize the history of government intervention in the macroeconomy with a simple flow chart. It explains periods of hyperinflation and the causes of sovereign debt crises. It is relevant for Weimar Germany, Mugabe’s Zimbabwe and most of the Western world as of today. The “old adage” of macroeconomics is as follows:

1. Governments run permanent budget deficit, which leads to a steadily increasing debt burden.
2. Unable to fund this through taxation or borrowing, ultimately the government seek to monetize the debt. The inflation that results creates an artificial boom, by pushing interest rates below their natural rate.
3. When the malinvestment made during the boom becomes evident, there is a bust, and the economy enters a recession.

It is also important to ensure that we aren’t neglected another important type of macroeconomic policy: structural policy.

There is increased attention by economists to structural policy (or “supply side” factors).