Summary

  1. Advocates of active policy view the economy as subject to frequent shocks that will lead to unnecessary fluctuations in output and employment unless monetary or fiscal policy responds. Many believe that economic policy has been successful in stabilizing the economy.

  2. Advocates of passive policy argue that because monetary and fiscal policies work with long and variable lags, attempts to stabilize the economy are likely to end up being destabilizing. In addition, they believe that our present understanding of the economy is too limited to be useful in formulating successful stabilization policy and that inept policy is a frequent source of economic fluctuations.

  3. Advocates of discretionary policy argue that discretion gives more flexibility to policymakers in responding to various unforeseen situations.

  4. Advocates of policy rules argue that the political process cannot be trusted. They believe that politicians make frequent mistakes in conducting economic policy and sometimes use economic policy for their own political ends. In addition, advocates of policy rules argue that a commitment to a fixed policy rule is necessary to solve the problem of time inconsistency.