Our final two chapters are devoted to macroeconomic policy. This chapter
considers monetary policy, and Chapter 12 considers fiscal policy. We will
focus on two main aspects of policy. The first is its short-run conduct: we
would like to know how policymakers should act in the face of the various
disturbances that impinge on the economy. The second is its long-run performance.
Monetary policy often causes high rates of inflation over extended
periods, and fiscal policy often causes persistent high budget deficits. In
many cases, these inflation rates and budget deficits appear to be higher
than is socially optimal. That is, it appears that in at least some circumstances,
there is inflation bias in monetary policy and deficit bias in fiscal
policy.