The assessment: Macroeconomic policy

This paper describes the emerging consensus about the 'reaction function' approach to macroeconomic policy. The first section of the paper describes the historical emergence of this consensus, as a synthesis of pre-Keynesian, Keynesian, and monetarist ideas. The theoretical part of the paper presents the basic framework of the approach and explains a number of extensions, including: finding the optimal reaction function, avoiding the problem of inflation bins, the relevance of the Taylor rule, forward-looking expectations, extensions to the open economy, and the interconnections between monetary and fiscal policy. The later parts of the paper contain a detailed discussion of some of the practical and institutional issues involved in the implementation of this new framework.