ECONOMICS:Any agreement among policymakers can be very fragile given today's new economic uncertainties, writes DAN O'BRIEN

MACROECONOMIC policy-making is at sea. How governments use the macroeconomic levers available to them – both fiscal and monetary – is subject to unprecedented debate and uncertainty.

Of late, the debate on fiscal policy has been centre stage. The range of respectable opinion in the economics profession has widened enormously during the Great Recession.

At one end of the spectrum are those who believe immediate and sizeable retrenchment is essential everywhere. At the other end, some are certain in their belief that sustained stimulus is imperative to avoid a return to global recession, or worse.

As recently as the beginning of the year, the international consensus among policymakers was that it was too early to begin fiscal tightening. Within months, that consensus changed, as reflected in the G20 end-of- summit communique last month and in the advice dispensed by leading international institutions such as the IMF and the OECD.

The speed with which the consensus changed reflected, of course, the changed circumstances – namely the eruption of the European sovereign debt crisis – but it is also indicative of just how fragile any consensus can be given the new uncertainties.

The debate on monetary policy has been a sideshow compared to the main event on fiscal policy, largely because the risks of maintaining monetary stimulus (that is, most importantly, the keeping of interest rates at low levels) appear smaller and much less immediate than allowing the fiscal taps to remain fully open.

The costs of a premature raising of rates also seem clear and large, given the extreme fragility of the financial system and the softness of the recovery in the real economy in places. This is in contrast to fiscal tightening, where the (unproven) argument can be made that any contractionary effects of retrenchment will be offset by confidence effects, as households and businesses are reassured that they will not be clobbered in the future by ever-rising taxes.

But the debate on monetary policy is likely to be just as fierce in the future, not least because it is obvious with hindsight that excessively low official interest rates were one cause of the crisis. While plenty of mistakes were made with fiscal policy, they contributed only marginally to the global financial crisis.

It will also be a more profound debate, because many of the most basic assumptions underpinning the conduct of policy are in question.

A very brief potted history puts the nascent debate in context. The Great Inflation of the 1970s took policymakers by surprise almost as much as the Great Recession. Debate on its causes and how to respond raged throughout that decade and into the 1980s. A new consensus emerged, slowly and unsteadily, that the targeting of consumer price inflation by independent central banks was the most effective option.

By the second half of the 1990s, inflation had been conquered, and central bankers believed that they had reached the promised land of solid, steady, low-inflationary economic growth. This period, from the mid-1990s to 2008, became known as the Great Moderation. It was no such thing.

In retrospect, it is hard to dispute that official interest rates were too low and that they contributed to excessive credit creation and asset-price bubbles. This was particularly the case in the US, where the now discredited head of that country’s central bank, Alan Greenspan, cut rates when asset prices fell, but stood by when they rose.

Most other central banks largely ignored asset prices, as the conventional wisdom of the time was that interest rates should target only consumer prices.

But as the costs of ignoring credit levels and asset prices have become all too clear, fundamental change is needed.

It will almost certainly take years before the lessons of recent years and decades are learnt and internalised by central bankers. The debate on whether to use the interest-rate tool to dampen asset-price inflation will be lively and long.

So, too, will discussion of the sort of additional tools which central bankers can and should adopt to aid or substitute for the interest-rate tool in controlling credit growth and asset prices.

These tools include setting limits on lending funded by sources other than deposits, and obliging banks to raise capital buffers as the rate of credit growth rises in order to address the now undisputed pro-cyclical effects of modern finance.

In the shorter term, however, decisions on interest rates will have to be made. In most developed countries, hikes seem a long way off. No doubt to the relief of many readers of these pages, the consensus view is that the European Central Bank will not move before the second half of next year.

That is certainly the most likely outcome, but just as the consensus on fiscal tightening changed quickly, it is possible that the consensus on monetary tightening could also do so.