How macroeconomists lost control of stabilization policy: towards dark ages

Abstract

This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilisation policy from 1948 to 1975 and the subsequent break of the use of control for stabilisation policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favoured their support of rules against discretionary stabilisation policy. The Lucas critique and Kydland and Prescott’s time-inconsistency were over-statements that led to the “dark ages” of the prevalence of the stabilisation-policy-ineffectiveness idea. These over-statements were later revised following the success of the Taylor rule.

Keywords:

• Control
• stabilisation policy ineffectiveness
• negative feedback
• dynamic games

JEL CLASSIFICATION:

• B22
• C61
• C62
• C73
• E52

Acknowledgements

We thank two anonymous referees and editors Hans Michael Trautwein, André Lapidus, Jean-Sébastien Lenfant, and Goulven Rubin. We thank Alain Raybaut our discussant as well as participants of the session at ESHET conference in Lille 2019. We thank Marwan Simaan and Edward Nelson for useful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 A model exhibits Kalman controllability if the policy instruments have a direct or indirect effect on the policy target.

2 Phillips’ and Taylor’s fathers were also engineers, (Leeson and Taylor 2012).

3 He was invited to participate in the world econometric congress in 1980 in Aix en Provence, but his paper was not published in Econometrica. He later received the highest honor of US science, the US medal of science in 2009.

4 Sergi (2018) provides the history of the Lucas (1976) critique in relation to real business cycles models and dynamic stochastic general equilibrium models which followed Kydland and Prescott (1982) paper.

Additional information

Funding

PSE thanks the support of the EUR grant ANR-17-EURE-001.