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My assignment for this paper is to provide an up-to-date review of the rational expectations debate about whether activist monetary and fiscal policies can improve macroeconomic performance. Preparing a review is particularly difficult at the present time, because we do not seem to be having much of a debate over policy activism. Looking back over the past five years since I prepared a similar review paper for this conference series [see Taylor (1980)], it now seems to me that the debate about policy effectiveness that raged between rational expectationists and other macroeconomists during the l970s essentially ended in the early 1980s. Since then, only a few analytical or empirical studies of alternative policy proposals have been conducted, and more importantly little effort has been made to reach agreement among the various proposers, or even delineate specific reasons for disagreement. Clearly a renewal of discussion on these important issues is in order. Rather than provide a detailed review of an old debate, this paper presents a case and outlines a framework for a new debate about policy. It argues that a good framework for debate is the rational expectations approach to policy evaluation that emerged from the policy ineffectiveness debate of the 1970s, but which has been used far too rarely to study other activist policy issues. The paper includes an outline of the essential aspects of a rational expectations approach to the policy activism question.

An Appeal for Rationality in the Policy Activism Debate