The Cost Channel of Monetary Policy in a Post Keynesian Macrodynamic Model of Inflation and Output Targeting
AbstractThis paper contributes to the debate about whether or not inflation targeting is compatible with Post Keynesian economics. It does so by developing a model that takes into account the potentially inflationary consequences of interest rate manipulations. Evaluations of the macroeconomic implications of this so-called cost channel of monetary policy are common in the mainstream literature. But this literature uses supply-determined macro models and provides standard optimizing microfoundations for the various ways in which the interest rate can affect mark-ups, prices and ultimately the form of the Phillips curve. Our purpose is to study the implications of different Phillips curves, each embodying the cost channel and derived from Post Keynesian, cost-based-pricing microfoundations, in a monetary-production economy. We focus on the impact of these Phillips curves on macroeconomic stability and the consequent efficacy of inflation and output targeting. Ultimately, our results suggest that the presence of the cost channel is of less significance than the general orientation of the policy regime, and corroborate earlier finding that, in a monetary-production economy, more orthodox policy regimes are inimical to macro stabilization.
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Bibliographic InfoPaper provided by Trinity College, Department of Economics in its series Working Papers with number 1102.
Length: 36 pages
Date of creation: Apr 2011
Date of revision:
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Cost channel of monetary policy; incomes policy; inflation targeting; macroeconomic stability;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
- NEP-CBA-2011-04-30 (Central Banking)
- NEP-MAC-2011-04-30 (Macroeconomics)
- NEP-MON-2011-04-30 (Monetary Economics)
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