By J. O. N. Perkins (auth.)
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Extra resources for A General Approach to Macroeconomic Policy
It is therefore important that policy makers should know as much as possible about the relative effect of each of the available instruments on each of the objectives in which they are interested, and then decide the changes to be made in each of these instruments in the light of the information they have about these relative effects. 'TWO-BIRD' INSTRUMENTS (iii) There may be an instrument that can be changed in such a way as to increase real output (or employment) while exerting downward pressure on prices.
1988. pooling the year-to-year data for 15 OECD countries for the years 1967 to 1984. This study found that monetary policy (as thus measured) has a statistically significant (positive) relationship with the rise in prices over the immediately ensuing years, but not with unemployment rates; that, at the other extreme, tax cuts tended to be associated with falling unemployment in the following years, but not to have any clear relationship (positive or negative) with price changes in those years (which would be consistent with the above evidence that some types of tax cuts tend to increase prices and others to reduce them); while government outlays did not have a statistically significant apparent effect on unemployment, and (on one formulation) tended to be followed by higher rates of inflation or (on another formulation) not to have a significant relationship with prices in either direction.
An extreme example of the foregoing case would be if there are two instruments each of which affects a different objective, and only that objective. The possibility of such cases cannot be ruled out. For we have seen in Chapter 3 that some types of tax cut tend to raise prices and others to reduce them, so that there must be combinations of different types of tax cut (perhaps something close to a flat acrossthe-board cut in all types of tax simultaneously) that would have a negligible net effect on prices in the process of providing a real stimulus.
A General Approach to Macroeconomic Policy by J. O. N. Perkins (auth.)