ECO 2143 Lecture Notes - Lecture 11: Liquidity Trap, Nash Equilibrium, Precommitment
13 Apr 2016
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Document Summary
Policy makers have good intentions but can end up doing more harm than good. Policy makers do what is best for themselves, not for the country. It"s not possible to write a policy rule that covers every possibility. However, not every model gives the same conclusion. More over, they don"t answer all the same questions. For example, let"s assume that the economy is in recession. Therefore, the bank of canada would lower the interest rate in order to reduce in ation (okun"s law). This can easily lead to a liquidity trap. Therefore, policy makers prefer to make smaller changes because the negative e ects are minimized. They should also be aimed at broad objective (like. Lowering in ation instead of lowering in ation by 3% ) A macroeconomic policy is a game between policy makers and the economy . Indeed, policy makers act in accordance to economic conditions, but agents act according to what policy makers do.
