Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi

By Mario I. Blejer; Teresa Ter-Minassian | Go to book overview

2

MICRO AND MACRO ASPECTS OF FISCAL POLICY

Richard A. Musgrave1

Fiscal policy—interpreted broadly to encompass tax, expenditure and debt policy—has multiple objectives, including micro as well as macro concerns. How do its micro goals, such as the provision of public goods and adjustments in the state of distribution, interact with its role in macro policy, bearing on employment, inflation and growth? More basically, is the distinction between micro and macro issues a valid one? According to textbook practice, micro economics addresses the behavior of individual agents, relative prices and the allocation of resources, while macro addresses the behavior of economic aggregates. But with aggregates the outcomes of micro behavior, does macro analysis offer more than an exercise in aggregation? It does so, and for various reasons.

For one thing, the interaction of individual choices in the course of aggregation is a complex one, even in a setting where markets clear. For another, aggregate outcomes such as the economy’s rate of growth, the pattern of factor shares or the distribution of income are not explicit targets of micro intent. Yet they are of interest to public policy and deserve examination. Most important in our context, macro outcomes assume a life of their own in a setting where strategic markets do not clear and the micro behavior of individual agents fails to add up to their desired result. Where imperfections in the market for a particular product may cause limited damage to the efficiency of a specific resource use, market failure at strategic points of the system, e.g. a failure of interest rates to clear the supply and demand for loanable funds, may generate a much larger performance failure. Corrective macro instruments, including monetary and fiscal measures are then called for.

The role of fiscal policy and indeed the consequences of fiscal behavior thus depend on the macro as well as the micro functioning of the economy. But where micro analysis has moved along a steady path, macro models have remained in a state of flux, as have perceptions of the macro role of fiscal policy and the interplay of micro and macro concerns.

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