On the Policy Ineffectiveness Hypothesis

While the policy-ineffectiveness proposition has been widely debated, its validity and relevance can be defended on methodological grounds. To do so, one has to realize its conditional character. For new classicals, countercyclical stimulation of aggregate demand through monetary policy instruments is neither possible nor beneficial if the assumptions of the theory hold. If expectations are rational and if markets are characterized by completely flexible nominal quantities and if shocks are unforeseeable white noises, then macroeconomic systems can deviate from the equilibrium level only under contingencies (i.e. random shocks). However, no systematic countercyclical monetary policy can be built on these conditions. Even monetary policy makers cannot foresee these disturbances hitting economies, so no planned response to such shocks is possible.

According to the common and traditional judgement, new classical macroeconomics brought the inefficiency of economic policy to the fore. Moreover, these statements are always undermined by the fact that new classical assumptions are too far from life-world conditions to plausibly underlie the theorems. So, it has to be realized that the precise design of the assumptions underlying the policy-ineffectiveness proposition makes the most influential, though highly ignored and misunderstood scientific development of new classical macroeconomics.

New classicals have never asserted that activist economic policy (in a narrow sense: monetary policy) is ineffective. Lucas and his followers have drawn the attention to the conditions under which this inefficiency probably emerges.

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