How Macroeconomists Lost Control of Stabilization Policy: Towards Dark Ages

TL;DR

This paper reviews the historical shift in macroeconomic stabilization policy tools from 1948 to 1993, highlighting how ideological shifts and over-statements led to a decline in control-based approaches, later revived by the Taylor rule.

Contribution

It provides a historical analysis of macroeconomic stabilization tools, critiques over-statements like the Lucas critique, and explains the revival of control methods through the Taylor rule.

Findings

Control tools were dominant from 1948 to 1975.

The period from 1975 to 1993 saw a decline in control-based stabilization.

The Taylor rule contributed to the revival of control methods.

Abstract

This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilization policy from 1948 to 1975 and the subsequent break of the use of control for stabilization policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favored their support of rules against discretionary stabilization 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 stabilization-policy-ineffectiveness idea. These over-statements were later revised following the success of the Taylor rule.