The old and the new theory of economic policy

Abstract

This paper outlines contents of the new theory of economic policy that has emerged recently with reference to situations of strategic interaction. The new theory of economic policy is rooted in the classical contributions of Ragnar Frisch, Jan Tinbergen, Bent Hansen and Henri Theil, while being consistent with rational expectations (RE). It is based on a game-theoretic approach, and is particularly important for model and institution-building, as it states general conditions for the effectiveness of economic policy and the existence of equilibrium.