The differences in methodological approach to answer aggregate economic questions lead to different policy implications.
Discretionary policies One of the main differences between so-called "freshwater economics" and "saltwater economics" were in their findings on the effects of and relative importance of structural and discretionary policies. An implication of saltwater economic theory was that the government has an important role to play in order to actively and discretionarily stabilize the economy over the
business cycle through striving to fine-tune "aggregate demand". Researchers associated with the "saltwater school" found that government economic policies are of utmost importance for both the economy's abilities to respond to shocks and for its long-term potential to provide welfare to its citizens. These economic policies are the rules and structure of the economy. They might be how markets are regulated, what government insurance programs are provided, the tax system, and the degree of redistribution, etc. Most researchers that have been associated with the "freshwater school" have, however, found it hard to identify mechanisms through which it is possible for governments to actively stabilize the economy through discretionary changes in aggregate public spending. Like behavioral psychologists, they tend to be interested in situations where individuals and groups behave in a seemingly boundedly rational way. In contrast, freshwater economists have in general been interested in accounting for the behaviour of large groups of people interacting in markets, and believe that understanding market failures requires framing problems that way.
Fiscal policy "Saltwater
Keynesian economists" argue that business cycles represent market failures, and should be counteracted through discretionary changes in aggregate public spending and the short-term nominal interest rate. "Freshwater economists" often reject the effectiveness of discretionary changes in aggregate public spending as a means to efficiently stabilize business cycles. Economists loosely associated with the "freshwater school" have found that market failures might be important both as a cause of and as amplification and propagation of business cycles. However, it does not follow from these findings that governments can effectively mitigate business cycles fluctuations through
discretionary changes in aggregate public spending or the short-term nominal interest rate. Instead they find, in general, that government policies would be more effective if they concentrate on structural reforms that target identified market failures. These economists also emphasize that the government budget constraint is the unavoidable accounting identity and connection between deficits, debt, and inflation. == See also ==