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Modern macroeconomics in practice: How theory is shaping policy

Chari, VV; Kehoe, PJ; (2006) Modern macroeconomics in practice: How theory is shaping policy. Journal of Economic Perspectives , 20 (4) pp. 3-28. 10.1257/jep.20.4.3. Green open access

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Over the last three decades, macroeconomic theory and the practice of macroeconomics by economists have changed significantly -- for the better. Macroeconomics is now firmly grounded in the principles of economic theory. We focus on the role of economic theory in shaping policy. Over the last several decades, the United States and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests. The evidence that theoretical advances have had a significant effect on the practice of policy is often hard to see for policymakers and advisers involved in the hurly-burly of day-to-day policymaking, but easy to see if one steps back and takes a longer-term perspective. Examples of the effects of theory on the practice of policy include increased central bank independence; adoption of inflation targeting and other rules to guide monetary policy; increased reliance on consumption and labor taxes instead of capital income taxes; and increased awareness of the costs of policies that distort labor markets.

Type: Article
Title: Modern macroeconomics in practice: How theory is shaping policy
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/jep.20.4.3
Publisher version: https://doi.org/10.1257/jep.20.4.3
Language: English
Additional information: This is the published version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10054401
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