Economic policy

Economic policy is the set of government actions setting levels of taxation, government budgets, the money supply and interest rates, regulation of the labour market, and other actions that can affect the economy. Economic policy is a broad term for both the goals governments pursue and the tools they use.

Most economic policy instruments can be divided into either fiscal policy, which deals with government revenue and expenditure decisions, or monetary policy, which deals with central banking actions regarding the money supply and interest rates. In addition, governments shape economies through industrial policy, regulatory frameworks, redistribution through taxes and transfers, and trade policy. At the international level, institutions such as the International Monetary Fund and World Bank shape policy formulation.

The intellectual foundations of economic policy have shifted dramatically across history. Mercantilist doctrines dominated European states from the seventeenth century until challenged by classical economists such as Adam Smith. The Great Depression of the 1930s discredited laissez-faire orthodoxy and gave rise to Keynesiandemand management, which itself came under attack during the stagflation of the 1970s. The late twentieth century saw a turn toward inflation targeting central banks, fiscal rules, and market liberalization, while the 2008 financial crisis and the COVID-19 pandemic of 2020 prompted a scale of government intervention not seen since the postwar era.

A persistent challenge in economic policy is that desirable goals often conflict. Policies that reduce unemployment can raise inflation, and expansionary fiscal policy can crowd out private investment. These trade-offs remain central concerns in economic debates along with whether policy should be based on rules or discretion.