The 1990s synthesis
As foreshadowed in earlier chapters, policymakers in the market economies reached a radical compromise in the design of macroeconomic policy in the early 1990s which, despite initial doubts, has appeared to offer genuine promise for the future. An important precursor was the inflation targeting pioneered in New Zealand. Much of the new thinking crystallised slightly later in the blueprint for European Monetary Union (EMU) laid out in the Maastricht Treaty (1992) and the changes that flowed from it. The new consensus represented a reconciliation of the two conflicting ideologies that had been embraced in turn in market-based economies during the previous 50 years, and eventually found wanting. Out of the failure of Keynesian demand management in the 1970s and the monetarist experiment of the 1980s emerged a hybrid approach which combined successful features from both approaches. Despite early scepticism, the 1990s settlement turned out to be effective for around 15 years in maintaining price stability and steady economic growth with (eventually) falling unemployment in economies where it was put into practice, as may be seen in the right-hand segments of Figure 1.1. But it has recently run into such severe turbulence that its very survival is now in question, and few would deny that some rethinking is necessary.