Saturday, February 12, 2011

The Tinbergen Rule.

The Tinbergen rule was formulated by the economics Nobel laureate, Jan Tinbergen. There seems to be some confusion as to exactly what the rule consists of, but it is often stated as something like “for each policy objective, at least one policy instrument is needed”.

For example to deal with the problem that the elderly need support (a policy objective), some sort of pension policy is needed (a policy instrument).

The Tinbergen rule is stated by Dr. Derick Boyd* very much in the above form, i.e. “there should be at least the same number of instruments as there are targets”.

I suggest Tinbergen made a mistake here (if the above is a fair summary of his rule). Reasons are thus.

It cannot make sense to have more than one instrument address a particular objective because one of the instruments has to be better than the other.

Of course it is always possible that one instrument deals with a particular ASPECT of an objective better than another instrument. But in this case, doesn’t that aspect become a separate objective?

For example, if one pension scheme covers funeral costs and a second one doesn’t, then the former is arguably superior. But “funeral costs” is a separate objective to “costs of supporting the elderly”.

In other words, the principle should state, “for each policy objective, one policy instrument is needed, and one only.”

Thoughts, anyone?

A few minutes of Googling will produce plenty of material on the Tinbergen principle, but here are a couple of “starters”

* The Theory of Macroeconomic Policy, East London Business School, (available on the internet).


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