IEA's Conceptual Framework
for Macroeconomic Analysis and Policy

Traditional business-cycle, Keynesian, monetarist and neo-classical economic theories (and economic teaching) are in such serious disarray that there is an embarrasing lack of consensus and reliability on monetary, fiscal and other aspects of macroeconomic management.

IEA uses a comprehensive conceptual framework that makes it possible to "complete the Keynesian Revolution" by conceptually, analytically and empirically bridging the Keynesian/NIPA financial gap between financial saving and credit-financed GDP spending -- and by providing a more precise conceptual framework for describing economic fluctuations -- so that macroeconomic analysis and policy can become a more credible science to meet the challenges of the 21st century.

This framework has three main aspects:

A. The Integrating Dynamic Money-Flow (IDMF) Conceptual Framework
B. The Full-Employment Growth-Trend Standard of Reference
C. Structural Equilibrium Analysis

which provide the basis for a conceptually and empirically integrated Policy Package.

The Framework
(For detailed explanations, see The IEA Conceptual and Analytical Framework)

A. The IDMF Conceptual framework

B. The Full-Employment Growth-Trend Standard of Reference

C. Structural Equilibrium Analysis

Policy implications
(For fuller explanation, see Macroeconomic Policy Tools & Their Coordination)
  1. Government Macroeconomic Responsibility is to maintain an economic environment of structurally-balanced, environmentally-sustainable, full-employment growth, with low inflation and low interest rates -- as required by the long-ignored Humphrey/Hawkins "Full Employment and Balanced Growth Act of 1978". Such an environment best facilitates the long run planning of families, local governments and responsible private enterprise.

  2. Monetary Policy.  Since the Federal Reserve largely controls the unemployment rate and GDP growth rate, its ad-hoc, judgment-based monetary policy decisions are replaced by the precise, easily understandable, empirical-based Money-Growth Formula that the IEA conceptual framework makes possible.

  3. Budget Policy.  Genuine fiscal and economic responsibility requires use of dual operating budgets, in both of which the Social Security Trust Fund is excluded (as private pension funds are excluded from business operating budgets). The primary basis for budget projections, debate and legislation is the Standardized-Employment Budget based on the 4% unemployment rate mandated by the Humphrey/Hawkins Act.

  4. Fiscal (Stabilization) Policy  (effect of the federal deficit/surplus on the economy). The traditional economy-dependent "automatic stabilizer effect" and budget deficits caused by Federal Reserve anti-inflation policy, are replaced by a pro-active, Formula-Automatic Stabilization Adjustment (FASTA) which causes changes in federal borrowing (deficit or surplus) to maintain a stable balance between the economy's total supply and demand for credit, at stable low interest rates.

  5. Anti-inflation Policy.  Use of high unemployment as the primary anti-inflation policy tool is replaced by a more comprehensive focus on the "cyclical," structural, institutional and excessive-market-power relationships which directly affect prices and wages.

  6. Income Distribution Policy.  Emphasis on "after-market" redistributive taxes and subsidies is replaced by emphasis on "pre-final-market" institutional relationships -- educational opportunities, economic concentration and market power, credit-availability, low interest rates -- and other policies to achieve greater equality of economic opportunity and market bargaining power, for both individuals and businesses -- and particularly by maintaining a stable, full-employment economic environment.

Last revised: April 19, 1999
To IEA home page