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Monetary Policy Uncovered: Theory and Practice

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  • Giuseppe Fontana
  • Alfonso Palacio-Vera

Abstract

This paper discusses the current 'new consensus' view on monetary policy and the theoretical framework on which that practical view relies, namely, the 'targets-and-instrument approach'. We argue that in the modern world of financial innovation and liability management central banks cannot choose between an interest rate-targeting policy and a money-targeting policy. A money-targeting regime is not desirable, if not unfeasible. In addition, in the context of Poole's approach to the 'instrument' problem, the implementation of a money-targeting regime would raise the expected value of the loss function of the central bank and would thus shift the balance in favour of an interest-rate targeting regime.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 18 (2004)
Issue (Month): 1 ()
Pages: 1-19

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Handle: RePEc:taf:irapec:v:18:y:2004:i:1:p:1-19

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Related research

Keywords: Monetary policy; Poole's approach; Post Keynesian economics; endogenous money;

References

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  1. Richard D. Porter & Thomes D. Simpson & Eileen Mauskopf, 1979. "Financial Innovation and the Monetary Aggregates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 213-230.
  2. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  3. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A price target for U.S. monetary policy? Lessons from the experience with money growth targets," Working Paper Series, Macroeconomic Issues WP-96-14, Federal Reserve Bank of Chicago.
  4. Modigliani, Franco & Rasche, Robert & Cooper, J Philip, 1970. "Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(2), pages 166-218, May.
  5. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
  6. Thomas I. Palley, 1996. "Accommodationism versus Structuralism: Time for an Accommodation," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 18(4), pages 585-594, July.
  7. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
  8. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  9. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
  10. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  11. Pierce, James L, 1984. "Did Financial Innovation Hurt the Great Monetarist Experiment?," American Economic Review, American Economic Association, vol. 74(2), pages 392-96, May.
  12. John B. Taylor, 1995. "The monetary transmission mechanism: an empirical framework," Working Papers in Applied Economic Theory 95-07, Federal Reserve Bank of San Francisco.
  13. Hoover, Kevin D., 1991. "The causal direction between money and prices : An alternative approach," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 381-423, June.
  14. Goodhart, Charles A E, 1994. "What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?," Economic Journal, Royal Economic Society, vol. 104(427), pages 1424-36, November.
  15. Thomas I. Palley, 2002. "Endogenous Money: What it is and Why it Matters," Metroeconomica, Wiley Blackwell, vol. 53(2), pages 152-180, 05.
  16. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
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Citations

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Cited by:
  1. Giuseppe Fontana & Bill Gerrard, 2006. "The future of Post Keynesian economics," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(236), pages 49-80.
  2. 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 & Francis Journals, vol. 25(6), pages 693-723, November.
  3. Giuseppe Fontana, 2006. "The "New Consensus" View of Monetary Policy: A New Wicksellian Connection?," Economics Working Paper Archive wp_476, Levy Economics Institute.

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