Activist vs Non-Activist

Topics: Inflation, Keynesian economics, Monetary policy Pages: 3 (951 words) Published: March 3, 2013
Activist Theory
Economists that are known as Activist support a significant role for the government. These Activist monetary policies are policies whose purposes were to keep output and employment close to their full level at all times. Individuals who supported Activists believed that there was long run trade-off between inflation and unemployment explained by the Phillip curve. What the monetary authorities according to this view do is that they could maintain a temporary lower rate of employment by accepting some degree of inflation. However, the activist monetary policies of the 1970s and 1980s did not only fail to deliver the promised benefits, but also helped to generate inflationary pressures that could be unresponsive only at high economic cost. Today the activist’s monetary policy is not effective. Majorly, it was accepted that due to the dynamic inconsistency problems, there must be some restrictions on the Central Bank’s activity, pressures of the politicians or the private sector on the Central Bank to stimulate the economic activity may result in instability of prices. Monetary policy activism is measured by the cumulative response to both expected and actual inflation rates. Since the early 1990s, an increasing number of central banks have adopted an inflation-targeting framework, in which explicit inflation objectives have been set up. By developing a formal theoretical model within a New Keynesian framework, we show that the recent fall in activism can be seen as a less binding restraint of an inflation target range. The countries with superior inflation records were in a situation where they did not have to react to inflation very aggressively. On the other hand, countries with less favourable inflation records need to maintain high levels of activism to keep inflation within the desired range.

In recent years, activist monetary policy rules responding to inflation and the level of economic activity have been advanced as a means of achieving...
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