The Reform of Macroeconomic Policy

The Reform of Macroeconomic Policy

Also by f. 0. N. Perkins A GENERAL APPROACH TO MACROECONOMIC POLICY ANTI-CYCLICAL POLICY IN AUSTRALIA AUSTRALIA IN THE WORLD ECONOMY AUSTRALIAN MACROECONOMIC POLICY, 1974-85 BRITAIN AND AUSTRALIA: Economic Relationships in the 1950s BUDGET DEFICITS AND MACROECONOMIC POLICY CONTEMPORARY MACROECONOMICS (with R. S. Jones) CRISIS-POINT IN AUSTRALIAN ECONOMIC POLICY INTERNATIONAL POLICY FOR THE WORLD ECONOMY MACROECONOMIC POLICY IN AUSTRALIA NATIONAL INCOME AND ECONOMIC PROGRESS (editor with Duncan Ironmonger and Tran Van Hoa) STERLING AND REGIONAL PAYMENTS SYSTEMS THE AUSTRALIAN FINANCIAL SYSTEM AFTER THE CAMPBELL REPORT THE DEREGULATION OF THE AUSTRALIAN FINANCIAL SYSTEM THE MACROECONOMIC MIX IN THE INDUSTRIALISED WORLD THE MACROECONOMIC MIX TO STOP STAGFLATION THE WALLIS REPORT AND THE AUSTRALIAN FINANCIAL SYSTEM UNEMPLOYMENT, INFLATION AND NEW MACROECONOMIC POLICY

The Reform of Macroeconomic Policy From Stagflation to Low or Zero Inflation ]. 0. N. Perkins Emeritus Professor University of Melbourne Australia pal grave macmillan

J. O. N. Perkins 2000 S o f t c o v e r r e p r i n t o f t h e h a r d c o v e r 1 s t e d i t i o n 2 0 0 0 9 7 8-0 - 3 3 3-7 7 0 7 2-6 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. Published by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. I S B N 9 7 8-1 - 3 4 9-4 1 5 2 1-2 I S B N 9 7 8-0 - 2 3 0-2 8 8 7 3-7 ( e B o o k ) D O I 1 0. 1 0 5 7 / 9 7 8 0 2 3 0 2 8 8 7 3 7 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Catalog Card Number: 99 38849 Transferred to digital printing 2002

Contents List of Tables Acknowledgements vi ix 1 Introduction (1998) 1 2 Principles of Macroeconomic Policy in a Stagflationary World (1981) 4 3 Macromiximisation (1980) 28 4 Towards the Formulation and Testing of a More General Theory of Macroeconomic Policy (1987) 53 5 Some Empirical Evidence about the Macroeconomic Mix (1990) 71 6 Empirical Evidence about the Macroeconomic Mix in the Open Economy (1989) 87 7 Public Finance and Macroeconomic Policy (1991) 109 8 Of Budget Deficits and Macroeconomic Policy (1996) 128 9 The Dangers of Targeting the Budget Deficit (1995) 143 10 Of Wage Tax Trade-offs and Macroeconomic Mixes (1981) 156 11 Deregulation and Macroeconomic Policy (1989) 167 12 Macroeconomic Policy in Conditions of Low, Zero or Negative Inflation (1998) 178 Appendix: Gilbertian Parodies for Economists 192 References 197 Index 201 v

List of Tables 2.1 Tax revenue as a ratio of GDP in OECD countries, 1965 80 21 2.2 Estimated real long-term bond rate, seven major OECD countries, 1965 80 23 4.1 Analysis of possible combinations of assumptions with three instruments 59 4.2 Estimated macro policy effects, 15 OECD countries, 1967 84 62 4.3 Sensitivity analysis of estimated macro policy effects, 15 OECD countries, 1967 84 64 4.4 Combinations of assumptions closest to those implied by the test results 67 5.1 Simulated effects of alternative forms of macroeconomic stimulus in UK models on real GDP as a percentage of their effects on consumer prices 76 5.2 Simulated effects of alternative forms of macroeconomic stimulus on real GNP/GDP as a percentage of their effects on the GNP/GDP price index, seven major OECD countries with floating exchange rate 79 5.3 Simulated effects of a rise in government outlays on real output as a percentage of their effects on prices, seven major OECD countries with floating exchange rates 81 5.4 Simulated effects of alternative forms of fiscal stimulus on real GDP as a percentage of their effects on prices, EEC 82 6.1 Simulated effects of alternative measures on change in real foreign balance for 1 per cent stimulus to real GDP, with floating exchange rates, seven major OECD countries 90 6.2 Simulated effects of alternative measures on change in thrift for 1 per cent stimulus to real GDP, floating exchange rates, seven major OECD countries 91 6.3 Combinations of income tax cuts with reductions of government outlays equal to 1 per cent of GNP/GDP to give non-inflationary stimulus, floating exchange rates and fixed quantity of money, seven major OECD countries 93 6.4 Effects of alternative fiscal measures in the USA, floating exchange rates and fixed quantity of money 95 6.5 Simulated effects of alternative macroeconomic measures on UK current account balance for 1 per cent rise in real GDP 97 vi

List of Tables vii 6.6 Simulated effects of alternative fiscal measures on the current account balance and on private investment, for 1 per cent rise in real GDP, European Community 100 6.7 Simulated effects on private investment and the current account of alternative forms of fiscal stimulus, EEC 102 6.8 Simulated effects on the EEC current account of alternative combinations of tax cuts with reductions in government outlays that to 1 per cent of GDP 104 7.1 Simulated change in rate of consumer price inflation for 100 000 rise in employment, UK 114 7.2 Simulated change in average annual rate of inflation (GNP/GDP price index) over five years, resulting from alternative fiscal measures for 1 per cent stimulus to employment, seven major OECD countries 115 7.3 Simulated change in consumer price inflation for 1 per cent average rise in employment in five years in five years after the change in policy, EEC 116 7.4 Simulated effects of alternative fiscal measures on UK current account balance for 100 000 rise in employment 119 7.5 Simulated effect of alternative fiscal measures on the current account balance and private investment for 1 per cent rise in employment, EEC 120 7.6 Simulated effects of alternative fiscal measures of stimulus on thrift (private investment ± change in real foreign balance) for 1 per cent rise in employment, seven major OECD countries 121 8.1 Simulated effects of government non-wage expenditure and personal income tax cuts for a rise in financial deficit equal to 1 per cent of GDP/GNP, seven major OECD countries 132 8.2 Simulated effects on rate of inflation and real GDP growth rate of changes in government non-wage expenditures and cuts in a package of direct taxation having the same effect on budget balance, OECD 133 8.3 Simulated effect of various fiscal measures over five years, European Community 134 8.4 Simulated effects of various fiscal measures for an increase in the budget deficit equal to 1 per cent of GDP, USA 136 8.5 Simulated deviation of GDP price index from baseline in general government financial balance of 1 per cent of GDP, four Scandinavian countries 139

viii List of Tables 9.1 Simulated percentage-point differences from baseline reference scenario for effects of alternative fiscal policies (with given real interest rates), OECD, 1994 2000 153 9.2 Simulated percentage-point differences from baseline reference scenario for effects of alternative fiscal policies (with lower real interest rates), OECD, 1994 2000 154

Acknowledgements The author wishes to acknowledge permission to reprint articles from the following journals and individuals, namely, Journal of Economic Studies (Chapter 3), Tran Van Hoa (Chapter 4), Weltwirtschaftliches Archiv (Chapters 4 and 5), Economic Analysis and Policy (Chapter 7), D.T. Nguyen (Chapter 8), and The Economic and Labour Relations Review (Chapter 9). Comments and stimulus from Ian McDonald and Neville Norman over many years, including their comments on earlier drafts of many of these chapters, are gratefully acknowledged. They should not, of course, be held responsible for any remaining deficiencies. J.O.N. PERKINS ix