10.3.1—Policy effectiveness

A policy is effective when it changes the targeted outcome by more than its costs and side effects. Transmission lags, expectations, leakages, implementation quality and the binding constraint determine the result.

Fiscal multipliers may be smaller when imports and saving are high; monetary policy may be weak when banks or borrowers are constrained; supply reforms may take years. Evaluate the counterfactual rather than the announcement.

A rate cut may have little effect in a credit crunch, while targeted public investment can be stronger if idle labour and infrastructure bottlenecks are the main constraints.

A policy instrument’s textbook direction is not proof of a large real-world effect, and “more” policy is not always better.