Authors: Jesus Ferreiro, Felipe Serrano
Addresses: Faculty of Economics and Business, Department Applied Economics V, University of the Basque Country, Avenida Lehendakari Agirre, 83, 48015 Bilbao, Spain. ' Faculty of Economics and Business, Department Applied Economics V, University of the Basque Country, Avenida Lehendakari Agirre, 83, 48015 Bilbao, Spain
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.
Keywords: equilibrium; aggregate demand; uncertainty; institutional dimensions; mainstream economics; rational expectations; macroeconomic institutions; macroeconomics; short-runs; competitive markets; state interventions; government; consistent interventions; policy interventions; full employment; economic activity; employment levels; institutional frameworks; public policy; economic policies; alternative paradigms.
International Journal of Public Policy, 2011 Vol.7 No.1/2/3, pp.70 - 82
Published online: 14 Jan 2015 *Full-text access for editors Access for subscribers Purchase this article Comment on this article