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The Debate on Fine-Tuning: the Basic Issues

Published online by Cambridge University Press:  26 March 2020

A.P. Budd
A.P. Budd*
Affiliation:
London Business School
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Abstract

‘Fine-tuning’ can be defined as frequent discretionary adjustments to policy instruments. This article attempts to isolate this issue from a multiplicity of criticisms directed at UK economic policy-making. The attack on fine-tuning itself by the New Cambridge and the Manchester monetarist schools is shown to be connected essentially with the view that the economy is stable (i.e. returns to equilibrium in the absence of discretionary intervention). Nevertheless, even if the economy is stable, optimal control theory suggests that policy adjustments could be desirable, essentially because they could, at least in principle, speed the return to equilibrium. A more fundamental question concerns the way in which the private sector form their expectations; if they are ‘rational’, that is based on information at least as good as the authorities', then the grounds for discretionary intervention by the authorities are greatly diminished. These issues all require further empirical investigation.

Type
Articles
Information
National Institute Economic Review , Volume 74 , November 1975 , pp. 56 - 59
Copyright
Copyright © 1975 National Institute of Economic and Social Research

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Footnotes

(1)

I am grateful for helpful comments to Michael Beenstock and Patrick Minford.

References

Notes

(page 56 note 2) ‘Public expenditure, inflation and the balance of payments’, Ninth Report from the Expenditure Committee, Session 1974. HC 328, para 22. Italics in original.

(page 57 note 1) See H. P. Evans, C. J. Riley and J. R. Shepherd, ‘The Treasury short term forecasting model’, Government Economic Series Occasional Paper, no. 8, 1974, reprinted in G. A. Renton (ed.), ‘Modelling the Economy’, S.S.R.C., Heinemann, 1975.

(page 57 note 2) The written evidence was given in ‘Public expenditure and the management of the economy’, memorandum by Francis Cripps, Wynne Godley and Martin Fetherston. For brevity the views are henceforward attributed to Mr Godley alone, though he would be the last to claim sole authorship.

(page 57 note 3) The precise equation is to be found on p. 40, in Mr Bispham's article (Editor's note).

(page 57 note 4) Godley, para. 15.

(page 58 note 1) Godley, para. 14.

(page 58 note 2) For an account of some recent work, see Malcolm R. Gray, Michael Parkin and Michael T. Sumner, ‘Inflation in the United Kingdom: causes and transmission mechanisms’, paper for University of Manchester S.S.R.C. Research Programme, ‘Inflation: its causes, consequences and cures’, 1975.

(page 58 note 3) ‘A brief note on fiscal policy, inflation and the balance of payments’, memorandum submitted by D. E. Laidler, Minutes of Evidence, p. 50.

(page 58 note 4) Laidler, p. 50.

(page 58 note 5) For a discussion in the UK context, see D. A. Livesey, ‘Optimising short-term economic policy’, Economic Journal, vol. 81, 1971, p. 525.

(page 59 note 1) In the sense of John F. Muth, ‘Rational expectations and the theory of price movements’ Econometrica, vol. 29, no. 3, 1961, p. 315, that expectations are based on all the available information, including that about the workings of the economic system itself. Thomas J. Sargent, ‘Rational expectations, the real rate of interest, and the natural rate of unemployment’, Brookings Papers on Economic Activity, no. 2, 1973, p. 429, shows how a macro-economic model in which expectations are formed rationally, may be solved and manipulated.

(page 59 note 2) See for example, Milton Friedman, ‘Unemployment versus inflation’, Institute of Economic Affairs Occasional Papers, no. 44, 1975. For a British view antedating this, see A. A. Walters, ‘Consistent expectations, distributed lags and the quantity theory’, Economic Journal, June 1971.

(page 59 note 3) See Eugene F. Fama, ‘Efficient capital markets: a review of theory and empirical work’, Journal of Finance, May 1970, for a review of some of the evidence.