Can monetary and fiscal policy eliminate the business cycle?
THE ability of macroeconomic policy to erase the business cycle has in turn been greatly over- and underestimated over the decades. The broad consensus now is that monetary and fiscal policy can moderate the ups and downs, but they will never abolish the cycle altogether. In the 1950s and 1960s policymakers believed that by increasing government spending, trimming taxes or cutting interest rates they could avert recessions and control unemployment. But as inflation took off in the 1970s and public debt exploded, Keynesian fine-tuning went out of fashion. Policy in the 1980s and 1990s was aimed largely at reducing inflation, not stabilising output. Governments rejected active monetary and fiscal policies in favour of adherence to rules. Central banks were made independent, and many were given explicit inflation targets. Meanwhile, governments laced themselves into fiscal straitjackets. America set balanced-budget targets in the 1990s and the euro area adopted a fiscal stability pact wit
