Controllability in Policy Games: Policy Neutrality and the Theory of Economic Policy Revisited†

Issues of policy effectiveness and policy neutrality are widespread in the economic literature. They have been raised in a number of specific contexts over the past 20 years, most notably with reference to monetary policy. However, the general conditions which ensure the non-neutrality of any or all the policy instruments available to a policymaker in a strategic context still remain to be derived. To do that, this paper provides a generalization of the classical theory of economic policy developed by Tinbergen, Theil and others to a strategic environment. Computational algorithms, so that neutrality and controllability can be tested in practice, are given. We show that many of the standard policy neutrality propositions of monetary theory and in wage bargaining models then drop out as special cases of our encompassing approach but with much simpler interpretations