The institutional dimension of new economic policy
by Jesus Ferreiro, Felipe Serrano
International Journal of Public Policy (IJPP), Vol. 7, No. 1/2/3, 2011

Abstract: In the mainstream economics, the postulate of rational expectations downgrades the relevance of macroeconomic policy and institutions. In a world of full information and rational expectations, aggregate demand is irrelevant in anything other than a strictly short-run context, and the only institutions that matter (apart from competitive markets) are those that bind the state to consistent (and therefore predictable) policy interventions. However once the existence of fundamental uncertainty is recognised, both the importance of aggregate demand and the role of institutions in the economy are radically revised. Institutions must be required and designed to reach a full employment level of economic activity. A well-designed institutional framework is a necessary condition to warrant the existence of that outcome and to help to implement macroeconomic policies that allow to reaching and maintaining this objective.

Online publication date: Wed, 14-Jan-2015

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