Policy in crisis

By the end of the 1980s, inflation, high interest rates, and currency and debt crisis were all (theoretically) tied to ‘excessive’ budget deficits (see Fischer 1989). The mainstream political and economic discourse was now firmly geared to budget restraint or sound finance, which did not necessarily imply balanced budgets over the cycle.

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Wither fiscal policy

The anti-Keynesian revolution gained serious momentum following the stagflation episode. Monetarists had established monetary policy as the dominant instrument for economic stabilisation. According to Friedman and other Monetarists’, for example, Allan Meltzer and Karl Brunner, the conduct of monetary policy should be guided by simple, fixed rules.

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Full employment redefined

For many advanced economies, the early post-war period was characterised by full employment, modest inflation and economic prosperity. Under the guidance of the Keynesian model, fiscal and monetary policy was used for economic stabilisation and to achieve low levels of unemployment on a sustained basis.

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