10.3.2—Policy problems/conflicts

Policy conflicts arise when improving one objective worsens another—for example, demand stimulus can reduce unemployment but increase inflation, imports or debt.

Conflicts depend on the output gap, exchange-rate regime, supply response, distribution and time horizon. A policy can also have different effects on households, firms, regions and generations.

A tax rise may reduce inflationary demand but lower disposable income and employment; training may improve long-run supply while imposing short-run fiscal cost.

There is no universal list of “good” and “bad” policies: state the objective, mechanism, timing and affected group before judging the trade-off.