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Are Long-Run Price Stability And Short-Run Output Stabilization All That Monetary Policy Can Aim For?

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  • Giuseppe Fontana
  • Alfonso Palacio-Vera

Abstract

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stability, i.e. monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores conceptually how monetary policy should be implemented once these long-run effects are acknowledged. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Metroeconomica.

Volume (Year): 58 (2007)
Issue (Month): 2 (05)
Pages: 269-298

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Handle: RePEc:bla:metroe:v:58:y:2007:i:2:p:269-298

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  1. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA.
  2. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  3. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, 03.
  4. Dimitri B. Papadimitriou & L. Randall Wray, 1999. "Flying Blind: The Federal Reserve's Experiment with Unobservables," Macroeconomics 9903011, EconWPA.
  5. L. Randall Wray, 2004. "The Case for Rate Hikes: Did the Fed Prematurely Raise Rates?," Economics Public Policy Brief Archive ppb_79, Levy Economics Institute, The.
  6. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 129-136, 03.
  7. Jorg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute, The.
  8. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
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Citations

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Cited by:
  1. Eckhard Hein & Christian Schoder, 2011. "Interest rates, distribution and capital accumulation -- A post-Kaleckian perspective on the US and Germany," International Review of Applied Economics, Taylor and Francis Journals, vol. 25(6), pages 693-723, November.
  2. Eckhard Hein & Lena Vogel, 2007. "Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA," IMK Working Paper 03-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Rosaria Rita Canale, 2010. "Central Bank Reaction to Public Deficit and Sound Public Finance: The Case of the European Monetary Union," Journal of Advanced Studies in Finance, Association for Sustainable Education, Research and Science, vol. 0(1), pages 4-17, June.
  4. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
  5. José Luis Oreiro & Luiz Fernando de Paula & Gabriel Coelho Squeff, 2010. "A Post Keynesian Proposal for a Flexible Institutional Arrangement of Inflation Targeting Regime in Emerging Economies," Working papers - Textos para Discussao do Departamento de Economia da Universidade de Brasilia 336, Departamento de Economia da Universidade de Brasilia.
  6. Alfonso Palacio Vera, 2008. "Money wage rigidity, monopoly power and hysteresis," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 08-02, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  7. Canale, Rosaria Rita & Napolitano, Oreste, 2010. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 24705, University Library of Munich, Germany.
  8. Angel Asensio, 2009. "Between the cup and the lip," Working Papers halshs-00496911, HAL.
  9. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.
  10. Eckhard Hein & Achim Truger, 2008. "Fiscal policy in the macroeconomic policy mix: A Critique of the New Consensus Model and a comparison of macroeconomic policies in France, Germany, the UK and Sweden from a Post-Keynesian perspective," IMK Working Paper 03-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  11. Kai D. Schmid, 2010. "Medium-run macrodynamics and the consensus view of stabilization policy," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 322/2010, Department of Economics, University of Hohenheim, Germany.

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