The Debate on Fine-Tuning: the Basic Issues

Abstract

‘Fine-tuning’ can be defined as frequent discretionary adjustments to policy instruments. This article attempts to isolate this issue from a multiplicity of criticisms directed at UK economic policy-making. The attack on fine-tuning itself by the New Cambridge and the Manchester monetarist schools is shown to be connected essentially with the view that the economy is stable (i.e. returns to equilibrium in the absence of discretionary intervention). Nevertheless, even if the economy is stable, optimal control theory suggests that policy adjustments could be desirable, essentially because they could, at least in principle, speed the return to equilibrium. A more fundamental question concerns the way in which the private sector form their expectations; if they are ‘rational’, that is based on information at least as good as the authorities', then the grounds for discretionary intervention by the authorities are greatly diminished. These issues all require further empirical investigation.