3.3.8 Macroeconomic Management and the Role of Central Banks

(This is an archived extract from the book Patterns of Power: Edition 2)

Macroeconomic policies are those that affect the economy as a whole. In the words of Samuelson and Nordhaus:

“Thanks to Keynes and his modern successors, we know that in its choice of macroeconomic policies – those affecting the money supply, taxes, and government spending – a nation can speed or slow its economic growth, trim the excesses of price inflation or unemployment from business cycles, or curb large trade surpluses or deficits.”[1]

This definition of macroeconomics is useful, irrespective of whether one agrees with all of Keynes's recommendations. Macroeconomics is a contested subject. It is not possible to precisely calculate the impact of policy decisions: there are doubts about the accuracy of both current and historical data, there are disagreements about their interpretation, and the world is continually changing – which makes forecasting difficult. Difficult judgements have to be made in choosing the best policy:

· Managing government spending, taxation and borrowing (3.3.8.1);

· Responding to the economic cycle (3.3.8.2);

· Inflation (3.3.8.3);

· Balance of trade and currency exchange rates (3.3.8.4).