The Limits of Macroeconomic Policy Under the Eye of Economic Crisis

Periodically, the economy goes beyond the “normal” state in which the standard instruments of macroeconomic policy lose their effectiveness. The appearance of Keynesianism and Monetarism was the recognition that there are two qualitatively different states of the economy, the laws of which cannot be extrapolated to each other. When implementing monetary policy, it is necessary to take into account that the situation on the financial market has changed qualitatively, and therefore monetary policy primarily stimulates the growth of financial markets and only in the second place helps to restore the real economy. Monetary policy is not able to affect significantly the revival of the real economy if the central bank does not take measures to limit speculative activity in the financial market. Based on annual real U.S. GDP growth data during expansionary periods and the growth rate of the S&P 500 index from the 1980s to the present, one can conclude that the higher the level of speculative activity in the financial market, the lower the level of real GDP growth. By their actions to provide markets with liquidity and to lower interest rates to negative levels, central banks created a “new economic reality” that put limits to the effectiveness of their monetary policy. Our analysis brings us to the conclusion that in modern conditions it is necessary to revise the macroeconomic policy toolkit, and we agree with Hyman Minsky that a new approach to macroeconomic regulation is needed today, “fundamentally different from the mix that results when today’s accepted theory is applied to today’s economic system.”