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Alternatives to Inflation Targeting Monetary Policy for Stable and Egalitarian Growth: A Brief Research Summary

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  • Gerald Epstein
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    Abstract

    Many countries in the developing world have adopted an approach to monetary policy that focuses on maintaining a low level of inflation, to the exclusion of other important objectives such as employment generation, increasing investment or reducing poverty, despite the widespread evidence that moderate levels of inflation have few or no costs. Some have even adopted formal “inflation targeting”, an approach which commits the central bank to hitting a fairly rigid inflation target, often as low as 2%. However, this focus has led to slower economic growth and lower employment growth, without succeeding in lowering inflation at a smaller economic cost than traditional methods of inflation fighting. Clearly, it is time to find an alternative to inflation targeting. This paper presents the real targeting approach to monetary policy, which I argue is superior alternative to the costly and ineffective inflation targeting approach. Under this real targeting approach, central banks are given a country appropriate target such as employment growth, unemployment, real GDP or investment, usually subject to an inflation constraint. Given these two targets – the real target and the constraint – the central bank will find multiple tools to reach these targets, designing new tools and rediscovering old tools such as asset based reserve requirements and other credit allocation techniques. The real targeting approach might also be complemented by other policies, such as capital management techniques to deal with possible capital flight. The real targeting approach has the potential to make central bank policy more transparent, more accountable, and more socially useful than most currently existing central bank structures.

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    Bibliographic Info

    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp62.

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    Date of creation: 2003
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    Handle: RePEc:uma:periwp:wp62

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    1. Baker,Dean & Epstein,Gerald & Pollin,Robert (ed.), 1998. "Globalization and Progressive Economic Policy," Cambridge Books, Cambridge University Press, number 9780521643764, November.
    2. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
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    Cited by:
    1. Matias Vernengo, 2006. "The Political Economy of Monetary Institutions in Brazil: The Limits of the Inflation Targeting Strategy, 1999-2005," Working Paper Series, Department of Economics, University of Utah 2006_05, University of Utah, Department of Economics.
    2. James Heintz & Gerald Epstein, 2006. "Monetary Policy and Financial Sector Reform For Employment Creation and Poverty Reduction in Ghana," Working Papers wp113, Political Economy Research Institute, University of Massachusetts at Amherst.
    3. Stephanie Seguino, 2005. "Gender Inequality in a Globalizing World," Economics Working Paper Archive wp_426, Levy Economics Institute, The.
    4. Epstein, Gerald A., 2006. "Central Banks as Agents of Economic Development," Working Paper Series RP2006/54, World Institute for Development Economic Research (UNU-WIDER).
    5. Gerald Epstein, 2005. "Central Banks as Agents of Economic Development," Working Papers wp104, Political Economy Research Institute, University of Massachusetts at Amherst.
    6. James Boyce, 2008. "Post-Conflict Recovery: Resource Mobilization and Peacebuilding," Working Papers wp159, Political Economy Research Institute, University of Massachusetts at Amherst.
    7. Gerald Epstein & James Heintz, 2006. "Monetary Policy and Financial Sector Reform for Employment Creation and Poverty Reduction in Ghana," Country Study 2, International Policy Centre for Inclusive Growth.

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