White emphasises use of Austrian school in policymaking

In a Bank of Japan paper released on Friday, William White, the former economic adviser and head of the monetary and economic department of the Bank for International Settlements, says assumptions based on the Austrian school so often neglected in the past should be incorporated into macroeconomic models for policymaking.

White said the macroeconomic theories and models favoured by academics and policymakers effectively ruled out assumptions on economic and financial crises and that the longer-run dangers posed by the rapid expansion of credit and resulting private-sector balance-sheet developments were almost wholly ignored. The financial crisis, he said, suggests that basic Keynesian insights need to be complemented by some insights from the Austrian school as well as those of Hyman Minsky when building macroeconomic models, whereby supply-side in addition to demand-side financial considerations are made.

White also warned that policies with positive short-run effects can have negative effects over a longer time period and that supply-side policies must be given greater emphasis as fiscal expansion and monetary expansion had now reached their limits in some countries. He said such measures, along with more decisive efforts to reduce the headwinds of over-indebtedness, should with time provide the foundations for a sustainable economic recovery.

Click here to read the paper