Traditional economic policy

Traditional economic policy means that fiscal policy should be used to reduce unemployment during recessions and used to push inflation back in boom periods. Traditional economic policy was used in Sweden between the 1950s and the mid 1970s.

The goal of traditional economic policy was to smooth out cyclical fluctuations to get a steady growth. There are two main problems with traditional cyclical policy. The delay between action and effect makes it difficult to know when an action must be initiated and this can lead to larger economic fluctuations. The other problem is that market participants have rational expectations, which means that workers and companies directly demands compensation for higher prices. These rational expectations makes fiscal policy totally ineffective.