A deeper look at macroeconomic policy
Healthy macroeconomic policies can keep inflation under control and can stabilise the economy. Good monetary policies can also ensure a more robust business sector and encourage growth, particularly in times of crisis. In this context, the EU-funded project 'Monetary, fiscal and structural policies with heterogeneous agents' (Polhia) investigated new ways to implement key policies in Europe. After developing theories, software models and databases related to macroeconomic policies, it examined relevant factors such as expectations, fiscal policy, monetary policy, business growth, exchange rate dynamics and technological change. Subsequently, the project recommended building macro-dynamic models in which expectations were not formed according to a unique rational scheme, but as a result of different competing rules. It also showed how the economy tended to organise itself towards a spontaneous order, characterised sometimes by unemployment, unsold production, excess demands and credit rationing. Interestingly, the project revealed that the EU's stability and growth pact (SGP) was more of a public social norm that countries obeyed to preserve reputation with other EU members. With respect to educational policies, it showed how these combated low productivity and relieved financial constraints at the household level. Other policy-related subjects that were explored involved formulation of economic expectations as well as stabilisation models for fiscal and monetary policies. In addition, the project investigated the dynamics governing inequality, wage dispersion, labour market features and educational attainment. It collected experimental and empirical evidence regarding expectations and prediction rules, noting their important implications for macro-dynamics and monetary policy decisions. Many valuable findings emerged from these analyses on the economy, particularly in relation to inflation and the stabilising effect of monetary policies. Polhia's models and results have enabled a much deeper understanding of complex economic systems, contributing significantly to existing literature on financial constraints and economic activity. The results have been disseminated through several international conferences and workshops, the most important of which was the 16th Annual Workshop on Economic Heterogeneous Interacting Agents (WEHIA) held in Italy. The governance of fiscal policy in Europe will surely benefit from this project, as will debates on technical progress, labour market institutions and educational policies.
