Abstract

The Magic Polygon and the Trade-Off-Analysis

For the economic policy of most countries, the magic polygon seems to be regarded as the desirable leitmotif. But do economic policy measures actually pursue such objectives, and what weight do they assign to them? Questions of this nature resulted in the Anglo-Americancountries, and more recently also in Austria, in studies on the possible objective functions of monetary policy. They are based on preliminary work on the compatibility of objectives and the relative cost of their attainment and on the choice of suitable indicators which permit measurement of the direction and intensity of economic policy activity. This present study is of interest primarily because of its successful investigation of these preliminary questions. It discloses great differences in the “state of the science”. The question as to how far price stability and squaring of the balance of payments are independent and reasonable objectives of economic policy is still controversical. The mutual compatibility of objectives and the relative cost of attaining an objective at the expense of less complete attainment of another have been tolerably well investigated econometrically. So far, however, there has been scarcely any attempt to measure the economic cost (as opposed to costs in the form of less complete attainment of some other objective). The great difficulty, however, lies in examination of the question of what combination of objectives economic policy actually pursued in the past. Neither the objectives nor the direction and intensity of economic policy are susceptible of direct measurement; studies have to depend on indicators. And even the pertinent terminology has hardly been developed. This study suggests making a distinction between secondary objective indicators that show the objectives of economic policy and indicators of requirements, intentions and success that show the requirements, intentions and success of economic policy measures. In view of the terminological confusion, the results of the first econometric studies in this field are not strictly comparable. They seem to indicate, however, that at least monetary policy does not pursue a fixed bundle of objectives, but in each case pays special attention to objectives which are especially jeopardized. But it is probably not rigourously proven it places too much emphasis on price stability - if it ıs at all possible to call this an independent objective