ECONOMIC POLICY COURSE

Introduction to Economic Policy

Adam Czelleng, PhD

Associate Professor
 ABOUT THE CLASS MATERIALS

Slides (Coospace)

Articles and peer-reviewed papers (Coospace)

Nicola Acocella: Economic Policy in the Age of Globalization,

Cambridge University Press, 2005
 ABOUT THE GRADING

Two mid-term exams and Two presentations on

seminars + extra points (max 10 points)

Oral exam in the exam period for those who perform under
50% or who want to improve grade.
 AGENDA

02/06 Introduction
02/13 Macroeconomic Basics
02/20 Fiscal Policy
02/27 Monetary policy
03/06 Monetary policy II
03/13 Economic Policy
03/20 -
03/27 TEST
04/03 Energy Issues and Economic Policy
04/10 Financialisation and Financial Markets: Regulation
04/17 Inequality, Poverty and Demographic Issues
04/24 Climate change, environmental impact, technology and international markets
05/01 Presentations
05/08 TEST
 TOPICS OF THE COURSE

The role of state in the economy

Goals and tools for economic policy
Economic systems, models and strategies
The related institutions
Growth, equilibrium and reallocation
Economic policy in international context
Economic policy as usual and in crisis
 PREREQUISITES AKA WHAT WE WILL
TOUCH

Microeconomics – how markets work, how actors make

decisions

Macroeconomics – relationships in the economy, trade-off

Finance – how banking and capital markets work

Statistics – look behind the data

 ECONOMIC POLICY

Economic policy deals with the decisions of the state

that are carried out in order to achieve a favourable
resource allocation

Economic policy is the government’s decisions, views to

influence the economy

Economic policy significantly impacts the society and the

decisions of the economic actors
 POSITIVE VS NORMATIVE ECONOMICS

Positive Economics:
Statement of fact and logical deductions

Normative Economics:
Statement about what should be (values, judgement)
 THE FUNCTIONS OF ECONOMIC POLICY

Samuelson – Nordhaus:
1. Ensuring appropriate legal framework
2. Stabilising macroeconomy
3. Ensuring the allocation of resources is optimised
4. Decreasing inequality
 THE GOALS OF ECONOMIC POLICY

More wealth – economic development

• Support economic growth
• Increase efficiency
• Maintain economic stability
Fair allocation – redistribution system
• Decrease income inequality
• Decrease poverty
 THE FOCUS OF ECONOMIC POLICY

Four important (quantifiable) macroeconomic categories

Sustainable economic growth
GDP, GDP structure, GNI, GNI structure, Output gap
Stability
Macroeconomic stability (GDP volatility, Structure of GDP growth volatility,
volatility of net capital flow, CDS, Credit Rating, Yield curve)
Price stability (inflation, core inflation, GDP deflator, volatility of exchange rates)
Employment
Employment rate, Unemployment rate, Activity rate
Equilibrium
External equilibrium (current account, capital account)
Internal equilibrium (goverment debt, deficit)
CONFLICTS BETWEEN MACRO POLICY OBJECTIVES

It is rare to achieve all of the main macro aims as frequently

conflicts can appear between them

The extent of these trade-offs between objectives will vary

from one country to another

Exernal factors can affect which objectives are achieved

EXAMPLES OF POSSIBLE MACRO CONFLICTS

Unemployment and inflation

Growth and inflation

Growth and balance of payment

Growth and inequality

Impossible Trinity
 FORCES BEHIND ECONOMIC POLICY

1. Political environment - Political business cycle

2. International environment - International organisations and

agreements, investors, credit rating agencies

3. Theoretical background – Economics

4. Institutional environment – Path dependency, legal framework

5. History – Path dependency

 ACTORS OF ECONOMIC POLICY
MAKING

The state or government: employer, regulator, consumer,

taxing

Parties: create and contribute to the political environment

Labor and trade unions

International institutions
 ACTORS OF ECONOMIC POLICY

Local Foreign
Direct Government European Union
Central Bank IMF
Indirect Parties Credit Rating Agencies
Labor and trade unions Investors
 TOOLS OF ECONOMIC POLICY

Which tools can the government use to influence the economy?

• Fiscal policy tools: taxes and transfers (reallocation)

• Monetary policy tools: interest rates, exchange rate
• Regulation
• State-owned companies and privatisation
• Microeconomy tools: competition policy, industry policy, trade policy,
employment policy, etc.

Tools can be mixed and substituted

 EXAMPLE – MINIMAL WAGE SETTING

Minimal wage (MW) is the lowest wage that employers can legally pay to their workers.

Application of MW is not common and depends on various factors.

How should it be changed over years?

 EXAMPLE – MINIMAL WAGE SETTING

Minimal wage (MW) is the lowest wage that employers can legally pay to their workers.

Application of MW is not common and depends on various factors.

How should it be changed over years?

- indexation: (i) with inflation in the previous year (ii) with the expected inflation in the coming year
- negotiation with units
 EXAMPLE – MINIMAL WAGE SETTING 2

Effective on those submarkets where the labor market equilibrium would be below the new MW

Labor demand will decrease while labor supply will increase (only on the affected segment on the labor market)

Because of wage congestion, wages can increase generally everywhere (union of workers represents those who
are already employed therefore they are less sensitive for the increasing unemployment if it is caused by
increased activity)

Increase of minimal wage can depreciate the companies’ competitiveness, can increase unemployment (especially where the
substitutability of workers is high), increase the spending of the government and overall increase the inflation – Then why?
 EXAMPLE – MINIMAL WAGE SETTING 3

Because of the increasing disposable income, it increases the consumption -> GDP
(and because the increase in disposable income is more significant at the poorer segment in the society the increaseing
consumption usually do not lead significant increase in import)

Increase the wealth of the households

Increase the revenues of the government

Increase the willingness to work

Make the market whiter

ECONOMIC POLICY IN CLASSIC AL ECONOMIC
THOUGHTS

The invisible hand is the creator of the economy thus

economic policy
Laisses faire: The market above all
Say’s law: aggregate production necessarily creates an equal
quantity of aggregate demand
Limited role for the state:
• Maintain security
• Making inevitable investments
ECONOMIC POLICY IN NEOCLASSIC AL ECONOMIC
THOUGHTS

Market will reach equilibrium and equilibrium will maximize

social prosperity

Market interventions would obstruct economy to reach

equilibrium therefore role of the state is negligible

Equilibrium is in focus so prices float freely

ECONOMIC POLICY IN KEYNESIAN ECONOMIC
THOUGHTS

The theories forming the basis of Keynesian economics were

first presented during the Great Depression
Aggregate demand is volatile and unstable which will result
economic recessions (when demand is low) and inflation
(when demand is high)
These can be mitigated by economic policy actions (public
investments, transfers)
Emphasis on Fiscal policy
ECONOMIC POLICY IN NEOLIBERAL ECONOMIC
THOUGHTS

Keynesian economic policy led to stagnation and oil crisis

Extensive state decreases the market adjustment ability

Deregulation, fiscal austerity, privatisation and liberalisation

Supply side economy

ECONOMIC POLICY ISSUES

Environmental issues and pollution

Financial crisis
Low growth
Globalisation
IT and technology revolution
Non-convential monetary policy
Normalisation of monetary conditions
Income inequality
Gender pay gap
Too-big-to-fail
Student loans
Poverty
I N T RO D U C T I O N TO
M AC RO E C O N O M I C S
Thanks for your attention!

czelleng.adam@uni-bge.hu
czelleng.adam@gki.hu