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On the Effectiveness of Monetary Policy and of Fiscal Policy

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  • Philip Arestis
  • Malcolm Sawyer

Abstract

There has been a major shift within macroeconomic policy over the past two decades or so in terms of the relative importance given to monetary policy and to fiscal policy in both policy and theoretical terms. The former has gained considerably in importance, with the latter being rarely mentioned. Furthermore, the nature of monetary policy has shifted away from any attempt to control some monetary aggregate (prevalent in the first half of the 1980s), and instead monetary policy has focused on the setting of interest rates as the key policy instrument. There has also been a general shift towards the adoption of inflation targets and the use of monetary policy to target inflation. This paper considers the significance of this shift in the nature of monetary policy. This enables us to question the effectiveness of monetary policy, and to explore the role of fiscal policy. We examine these questions from the point of view of the "new consensus" in monetary economics and suggest that it is rather limited in its analysis. When the analysis is broadened out to embrace empirical issues and evidence the clear conclusion emerges that monetary policy is relatively impotent. The role of fiscal policy is also considered, and we argue that fiscal policy (under specified conditions) remains a powerful tool for macroeconomic policy. This is particularly an apt conclusion under current economic conditions.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0034676042000296218
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Review of Social Economy.

Volume (Year): 62 (2004)
Issue (Month): 4 ()
Pages: 441-463

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Handle: RePEc:taf:rsocec:v:62:y:2004:i:4:p:441-463

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Related research

Keywords: new consensus; macroeconomics; monetary policy; fiscal policy;

References

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  1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  2. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  3. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  4. Philip Arestis & Malcolm Sawyer, 2002. "Can Monetary Policy Affect The Real Economy?," Economics Working Paper Archive wp_355, Levy Economics Institute.
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Cited by:
  1. Karim Azizi & Nicolas Canry & Jean-Bernard Chatelain & Bruno Tinel, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," Documents de travail du Centre d'Economie de la Sorbonne 13042, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS
  3. Mark Hayes, 2006. "The Economics of Keynes: A New Guide to The General Theory," Books, Post Keynesian Economics Study Group (PKSG), number nggt.
  4. Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Analysis Research Group Working Papers earg-wp2007-13, Henley Business School, Reading University.
  5. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.

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