This paper gives an overview of the work of Carl Menger, the founding father of the Austrian School of Economics. Menger’s theoretical and methodological positions are compared and contrasted with those of contemporary Austrian Economics. The idea of the unintended consequences of individual purposive actions is seen as a key to Menger’s economics. Although many elements of contemporary Austrian Economics can be found already in the work of Menger, we argue that there are some differences with respect to economic theorizing and economic policy recommendations. We propose to bring Austrian Economics closer to mainstream economics, especially with respect to the analytical tools to be used.
We show an application of decentralized control theory to a macroeconomic model of unemployment and inflation. Fiscal and monetary policies are assumed to be designed by different institutions, namely the government and central bank respectively, and both policy-makers are assigned particular targets and may have different information. It is shown that the economic system can be stabilized by decentralized feedback. An interpretation in economic terms of the stabilizing controls and the conditions for stabilizability is given.
Sustainability of public deficit and debt in the long run has received much attention in the international political agenda. This paper analyses whether Austrian fiscal policies have been sustainable during the last five decades. Tests indicate that Austrian fiscal policies were sustainable from 1960 to 1974, while from 1975 onwards public debt grew much more rapidly. Starting in 1975, the rate of unemployment played a significant role in the sense of a counter-cyclical orientation of Austrian fiscal policy as part of the concept of ?Austrokeynesianism?. The development of public debt in Austria seems to be driven not only by ideology, but also by structural causes and a shift of the budgetary policy paradigm. We find some empirical evidence that governments in Austria dominated solely by one party run higher deficits than coalitions of the two large parties or the two conservative parties. There are no indications of a political business cycle.
This paper provides a selective survey of applications of control theory to the analysis of economic policy problems. We discuss applications of closed-loop control and of optimum control theory, including deterministic, stochastic and decentralized optimum control. Promising areas of mutual cooperation between control theorists and economists such as robust control and dynamic game theory are identified. A critical evaluation is given of different control theory approaches to an empirically useful theory of economic policy.
This paper provides a selective survey of applications of control theory to the analysis of economic policy problems. We discuss applications of closed-loop control and of optimum control theory, including deterministic, stochastic and decentralized optimum control. Promising areas of mutual cooperation between control theorists and economists such as robust control and dynamic game theory are identified. A critical evaluation is given of different control theory approaches to an empirically useful theory of economic policy. [All rights reserved Elsevier].
We develop a dynamic game model of a two-country monetary union to study strategic interactions between macroeconomic policy-makers facing adaptive inflationary expectations. In this union, governments of participating countries pursue national goals when deciding about fiscal policies, whereas the common central bank s monetary policy aims at union-wide objectives. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank, using the OPTGAME algorithm (Behrens and Neck, 2003a). Different solution concepts for this game serve as models of a conflict between national and supra-national institutions (non-cooperative Nash equilibrium) on the one hand and of coordinated policy-making (coopera- tive Pareto solutions) on the other. We show that the volatility of output and inflation increase when actual inflation reacts more strongly to expected inflation. Moreover, there is a trade-off between instruments and targets de- viations from desired paths.
Since the implementation of national accounts and economic statistics (approx. 1870), government expenditures have grown steadily in Austria. After World War II, the nominal ratio of government expenditures to GDP grew from 34% in 1954 to about 50% by the end of the 1990s. Two prominent theoretical explanations for public sector growth are, first, Wagner s Law assuming a positive income elasticity of demand for public goods. Second, Baumol s cost disease explains public sector growth with above-average cost increases in the public sector compared to the private sector. The empirical evidence of the current paper stresses the importance of the cost disease for Austria but reject the validity of Wagner s law. Furthermore, the business cycle influences government expenditures while a number of variables taken from recent public choice theories except for fiscal illusion do not exhibit a significant influence on the growth of the public sector.
This paper analyzes whether Austrian fiscal policies have been sustainable during the last four decades. We give an introduction to Austrian fiscal policy, emphasizing its macroeconomic orientation, especially during the period called Austrokeynesianism . Next, several econometric approaches to test for the sustainability of fiscal policies are applied to Austrian data. Most of these tests indicate that Austrian fiscal policies were sustainable in the period 1960 1974, while from 1975 2003, public debt grew much more rapidly, although (at least weak) sustainability of its development cannot be ruled out.
This paper analyzes whether Austrian fiscal policies have been sustainable during the last four decades. We give an introduction to Austrian fiscal policy, emphasizing its macroeconomic orientation, especially during the period called Austrokeynesianism . Next, several econometric approaches to test for the sustainability of fiscal policies are applied to Austrian data. Most of these tests indicate that Austrian fiscal policies were sustainable in the period 1960 1974, while from 1975 2003, public debt grew much more rapidly, although (at least weak) sustainability of its development cannot be ruled out.
To summarize, the analyses show that the advantages and disadvantages of different institutional setups strongly depend on the nature of the shock the economies are faced with. Fixed rules can be recommended to European policy makers as an answer to supply shocks, more active (flexible) policy rules as a reaction to demand shocks. Exchange rate targeting and income targeting by the ECB can lead to instability. For demand-side shocks, inflation targeting and price level targeting mostly produce acceptable results. In most of the scenarios, the EA enlargement does not lead to significant welfare effects on its present members. Thus, additional macroeconomic noise resulting from the CEEC membership does not seem to be too much of a problem for the EA incumbents. On the other hand, no significant advantages can be identified for them either. For the new EU members, introducing the euro causes reductions in macroeconomic welfare in some cases due to the loss of an independent monetary policy to deal with asymmetric shocks. Under a supply shock, the following results are obtained: For the European regions, no-policy strategies (fixed rules) are best. For the USA, on the other hand, the reverse holds: active fiscal and monetary policies unambiguously improve upon performance. Differences between the present and the enlarged EA are mostly small. Therefore, there are important differences also with respect to the international spillovers and feedbacks of shocks and policies. Previous results on the advantages of fixed rules in the case of supply shocks and more activist policies for demand shocks are supported by this analysis for the European countries, but not for the USA. In most of the scenarios, the EA enlargement does not lead to significant welfare effects for the present members of the EA. For the CEEC, EA membership only in a few cases provides significant reductions of macroeconomic welfare losses. The results for the USA are not substantially affected by including the CEEC in the EA, which may lead to conjecturing that global effects of the EA enlargement will be minor. It remains to be shown how robust these results are with respect to variations in the model used and to the assumptions about the objective functions. At present, it seems as if the decision about the EA participation of the new EU members need not primarily be influenced by macroeconomic policy considerations.
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