Macroeconomic Theories: Monetarism, New Classical Economics, and More
Monetarism
Monetarists believe that the amount of money in an economy is the key factor influencing economic activity. Therefore, they advocate for monetary policy as the primary tool for controlling the economy. A prominent monetarist was Milton Friedman, who developed his ideas within the “Chicago School” of economics. Monetarists believe in the long-term benefits of a competitive economic system and limited government intervention. They argue that state control is necessary to ensure the stability of the value of money.
Global Monetarism
Global monetarism, as explained by economists like Mundell and Johnson, addresses the internationalization of economies. In a system of fixed exchange rates, the inflation rate of smaller economies is determined by the price developments in the most influential countries. In such situations, monetarists recommend the use of flexible exchange rates to control prices through monetary policy.
Monetarism and Fiscal Policy
Monetarists are concerned about the impact of budget deficits on the money supply and, consequently, on the price level. They oppose discretionary intervention in the economy, advocating for the use of rules instead. They also support flexible exchange rates.
New Classical Macroeconomics (Rational Expectations)
New classical economists, who advocate for the theory of rational expectations, believe that economic actors will make rational decisions based on their interests and will not repeat past mistakes. They argue that information is costly and needs to be used efficiently. Discretionary economic policy is ineffective unless it is based on surprise measures. A key figure in this school of thought is Robert Lucas, who emphasized the circular causation between the present and the future. New classical economists believe that economic policy can be inconsistent over time, meaning that a policy that is optimal at the time of its design may become suboptimal in the future. They also believe that deception can be a tool of economic policy, with the government potentially deceiving the public for their own good.
Economics of Chaos
This approach uses complex mathematical techniques to design economic policy. It recognizes the economy as a complex system, applying the principles of chaos and order to understand its intricacies. The mathematics of chaos and order are used to study the behavior of complex processes, where the whole is greater than the sum of its parts.
Game Theory
Game theory analyzes situations where players, following a set of rules, try to achieve optimal results. The final outcome for each player depends on the actions of all players. Game theory is used to analyze the strategic confrontation between the government and economic actors.
Types of Games
- One-time games: Used to analyze the outcome of specific economic policies.
- Games with repetition or supergames: Incorporate time, where decisions are conditioned by previous actions.
Monetary Policy
Monetary policy refers to direct government actions to modify the amount of money in circulation or the cost of money. Its primary goal is to stabilize inflation. Monetary policy operates through various instruments and targets, ultimately aiming to achieve its objectives.
Instruments
- Monetary Base: Assets + Cash + Bank Cash
- Open Market Operations of Central Banks: The purchase and sale of bonds (formerly gold and currency) by the central bank. This has a double effect on the amount and cost of money.
- Operations on the Base Interest Rate: Increasing the interest rate is a restrictive policy, curbing investment and improving price stability. Lowering the interest rate can stimulate economic activity and reduce unemployment.
- Coefficient of Style: The minimum reserves required by banks. Reducing the coefficient of cash allows companies to sell more and provide liquidity to the economy, increasing demand. Increasing the reserve requirement is a restrictive policy.
- Other Instruments: Government policy credits (bank credit to specific groups), maximum interest rate (establishing a legal maximum), and consumer credit policies.
Fiscal Policy
Fiscal policy refers to government actions to manage public revenue and expenditure. Developed in the 1930s, it is primarily driven by Keynesian economics. Fiscal policy aims to influence aggregate demand.
Expansionary and Restrictive Fiscal Policy
- Expansionary: Increased government spending, lower taxes.
- Restrictive: Lower government spending, higher taxes.
Stabilizers
Fiscal stabilizers are mechanisms that automatically adjust the economy without discretionary government intervention. For example, a progressive tax system automatically slows economic growth during an expansionary period by increasing tax revenue.
Deficit or Surplus
- Deficit: When the government intervenes, the costs are higher. This deficit can be used for investment.
- Surplus: When the government does not intervene, the result is automatic stability.
Tax Delay
The tax system can hinder economic progress. If the cyclical elasticity of fiscal aspects impedes the economy from achieving a high balance, it can be problematic. For example, a progressive income tax system can discourage individuals from earning more, as a larger portion of their income is taxed. Solutions include returning excessive income tax revenue and providing subsidies to lower taxes.
Budget Constraint
Government expenditures cannot exceed revenue. The budget constraint equation is: GT = Tr + (Ht-Ht-1) + (Bt-Bt-1), where B = debt, H = money creation, and T = taxes. Today, banks cannot create money, only the central bank can.
Alternatives to Stabilization Policy
- Increased spending funded by tax increases (AG = AT; AB = AH = 0)
- Public deficit financed by borrowing (GT = AB, AH = 0)
- Public deficit financed by money creation (GT = AH, AB = 0)
- Mixed-financed public deficits and debt money creation (GT = AB + AH)
- Open market operations to finance the deficit (ac / p =- AB AH)
Globalization and the Coordination of Economic Policy
Globalization is accelerating the global integration of economies through production, trade, financial flows, technology diffusion, networks, and information flows. In cultural and anthropological terms, it can be seen as the consolidation of a universal “homo homos” at the expense of tribal identities.
Metaphor
The metaphor of antelopes being frightened by the presence of a lion (representing a real crisis in the real economy) or by the movement of leaves in the wind (representing speculative panic in the herd) illustrates the interconnectedness of global economies.
Approaches to the Concept of Globalization
- Greater freedom of capital movement, especially of money-capital.
- Interdependence of national production and relocation.
- Development of transnational companies that transcend national barriers.
- Loss of autonomy in national policies.
- Loss of credibility in some markets.