targeting by central banks in many countries since the early 1990s. It is also the intellectual
foundation of monetary policy-making in the euro area.
The theoretical roots of today’s ruling monetary policy paradigm should be traced back to
Milton Friedman’s seminal address to the American Economic Association in 1968, ‘The role
of monetary policy’ - one of the most influential, if not the most influential, article on
macroeconomics in the post-World-War-II period. Friedman (1968) discussed what monetary
policy can and cannot do. It should not try to peg the interest rate or the rate of
unemployment. Instead, it should focus on a nominal variable such as the exchange rate, the
price level or the money stock.18 He also provides a theoretical basis for his policy
recommendations founded on the natural rate approach.
Turning back to fiscal policy, no commonly accepted article or treatise on ‘The role of fiscal
policy’ similar to Friedman’s locus classicus on monetary policy has survived the test of time.
One of the last unified accounts of the Keynesian consensus concerning fiscal policy is
Blinder and Solow (1974). Today there is no common theory of fiscal policy, although there
has been a gradual movement away from the belief in short-term fine-tuning and discretionary
actions of the 1950s and 1960s to a more rule-bound approach, stressing fiscal discipline, the
role of automatic stabilizers and the long-term sustainability of public finances.
The divergence of views on fiscal policy is best illustrated on the basis of three key
dimensions of fiscal policy-making: goals, instruments and institutions. All possible
combinations of agreement and disagreement along these dimensions are represented in our
sample of 101 proposals to reform the SGP. The following examples illustrate the point.
Most obviously, there is a wide dispersion of views concerning the main goal of the SGP. In
our analysis of the 101 proposals, we identified at least seven different categories of fiscal
policy objectives - see Tables 1 and 2. However, even if there is an agreement on goals,
views may still diverge strongly concerning the proper instruments and institutions. For
instance, across all four groups found in our cluster analysis, many proposals agree on the
main goal of the SGP but draw different conclusions about either the effectiveness of fiscal
18 Among these three potential goals, the price level has emerged as the prime goal as witnessed by the
emergence of inflation targeting. Financial liberalization and the move from fixed to flexible exchange rates
have facilitated the adoption of inflation targeting. As is well known, Friedman (1968) proposed monetary
targeting, a strategy not followed today by central banks.
-26-