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What have central bankers learned from modern macroeconomic theory?

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  • Howitt, Peter
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    Abstract

    In this essay I argue that modern macroeconomic theory has fallen behind the practice of central banking. After briefly summarizing the current state of macro theory, I focus on what strikes me as the two most important developments in monetary policy in the last two decades – inflation targeting and dealing with financial crises. My analysis rejects the claims made by several authors to the effect that the proliferation of inflation-targeting regimes around the globe represents an application of well-established principles of macroeconomic theory. As for how monetary policy can promote financial stability, a subject on which most economists agree modern theory has been of little help, I argue that macroeconomics has lost touch with the fundamental raison d’être of central banking. My diagnosis is that macroeconomic theory has become distracted by its preoccupation with states of equilibrium, a preoccupation that inhibits analysis of a market economy’s coordination mechanisms. I conclude with a plea for a more diverse ecology of approaches to macroeconomic theory, one that finds room for agent-based computational economics as well as for more conventional equilibrium theories.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 34 (2012)
    Issue (Month): 1 ()
    Pages: 11-22

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    Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:11-22

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    Web page: http://www.elsevier.com/locate/inca/622617

    Related research

    Keywords: Macro theory; DSGE; Inflation targeting; Financial stability; Agent-based computational economics;

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    Cited by:
    1. Bill Russell, 2013. "Macroeconomics: science or faith based discipline?," Dundee Discussion Papers in Economics 276, Economic Studies, University of Dundee.
    2. Arouri, Mohamed & Jawadi, Fredj & Nguyen, Duc Khuong, 2013. "What can we tell about monetary policy synchronization and interdependence over the 2007–2009 global financial crisis?," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 175-187.
    3. Simpson, Nicole & de Araujo, Pedro & O'Sullivan, Roisin, 2012. "What should be taught in Intermediate Macroeconomics?," Working Papers 2012-01, Department of Economics, Colgate University.
    4. Ronny Mazzocchi, 2013. "Investment-Saving Imbalances with Endogenous Capital Stock," DEM Discussion Papers 2013/14, Department of Economics and Management.
    5. Edoardo Gaffeo & Mauro Gallegati & Umberto Gostoli, 2012. "An agent-based "proof of principle" for Walrasian macroeconomic theory," CEEL Working Papers 1202, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.

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