Comment on T. M. Andersen, "Macroeconomic Strategies towards Internal and External Balance in the Nordic Countries"

Abstract

In recent years it has become common to regard macroeconomic policies not as being chosen by an omnipotent policymaker but as resulting from the interplay among various groups in society. By viewing economic policy as endogenous, differences in macroeconomic performance across countries are explained by institutional arrangements rather than by policy choices. One example of such an approach is the game-theoretic literature on the interplay of monetary and fiscal policy which stresses the degree of independence of the central bank and the role of a conservative governor of the central bank. Another example is the literature on the impact of the degree of centralization of wage bargaining, and yet a third example is the literature on the relation between macroeconomic performance and support for the government in parliament. Torben Andersen notes that while institutional factors may explain some differences in performance, see for example Calmfors and Driffill (1988) or Roubini and Sachs (1989), there is certainly a great deal left unexplained. A comparison of the Nordic countries provides a case in point. Despite very similar institutional arrangements, recent macroeconomic performances have differed considerably, indicating the relevance of the oldfashioned approach, where policy choices are regarded as largely autonomous and the choices of macroeconomic strategy as an interesting question per se. Torben Andersen's paper gives a nice example of such a study. The paper starts by stating that a primary concern for economic policy in a small open economy is to strike a balance between unemployment and the external deficit. This may be a natural point of departure, since it is certainly true that these are commonly perceived by policymakers as two prime intermediary targets, and a large literature following Mundell and Fleming analyzes how both targets can be attained simultaneously. Nevertheless there are only very indirect links from the current account to