The Macroeconomic Challenge

The performance of the economy at the macro level depends on the ability of the decentralized price system to coordinate billions of decisions concerning the allocation of time between work and leisure, and the allocation of current income between consumption and saving. Government policies as they affect these decisions should be calibrated to be as welfare enhancing as possible, recognizing that such policies, though well intended, can be the opposite of what is called for—this is because of the possibility of misdiagnosis some underlying problem.

There are some principles of macroeconomic policy making that are well grounded in both theory and evidence. One is that government policies that narrow the ...

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