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Stabilization Policy and Private Economic Behavior

  • Design
  • Economics


Stabilization Policy and Private Economic Behavior MARTIN NEIL BAILY Yale University Stabilization Policy and Private Economic Behavior WILL THE initiation of active macroeconomic stabilization policies change the behavior of the private sector? If so, what will these changes be? And what are their implications for the design and effectiveness of stabilization policy? I will use two ways of searching for answers to these questions. The first is empirical. It involves looking at recent history and trying to discern relevant signs or patterns. The aim is to describe how the private sector has responded to cyclical fluctuations and how these responses have changed over time. The second approach is analytical. It explores consequences for the design and effectiveness of policy that stem from the assumption that pri- vate economic agents anticipate countercyclical policy actions. Why should this be a helpful exercise? After all, as many have suggested and as the empirical section of this paper generally shows, no clear-cut rules can describe postwar macroeconomic policy. Nor is it clear that all private economic agents make unbiased predictions of economic variables and in- corporate expectations about policy actions into their predictions. Never- theless, an answer to the "what if" question is helpful. If the effectiveness of policy actions depends upon the ability of policymakers to surprise the private sector, there is a legitimate worry about a decline in the impact of policy with its repeated use. If, on the other hand, the effectiveness of Note: I would like to thank participants in the Brookings panel and several col- leagues at Yale for helpful comments. David S. Coppock and Robert Lurie provided excellent research assistance. Financial support was provided by the National Science Foundation. 0007-2303/78/0001-0011$00.25/0 ? Brookings Institution 12 Brookings Papers on Economic Activity, 1:1978 policy is enhanced by rational anticipatory behavior

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