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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

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.

Suggested Citation

  • Gerald Epstein, 2003. "Alternatives to Inflation Targeting Monetary Policy for Stable and Egalitarian Growth: A Brief Research Summary," Working Papers wp62, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp62
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    References listed on IDEAS

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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, October.
    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.
    3. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Aug), pages 9-110.
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    Cited by:

    1. Stephanie Seguino, 2005. "Gender Inequality in a Globalizing World," Economics Working Paper Archive wp_426, Levy Economics Institute.
    2. Faul, Joseph & Khumalo, Bridgette & Pashe, Mpho & Khuzwayo, Miranda & Banda, Kamogelo & Jali, Senzo & Myeni, Bathandekile & Pule, Retlaodirela & Mosito, Boitshoko & Jack, Lona-u-Thando & Phiri, Andrew, 2014. "Is South Africa's inflation target too persistent for monetary policy conduct?," MPRA Paper 58233, University Library of Munich, Germany.
    3. Ayşe Özden Birkan, 2012. "Inflation targeting in an import dependent indebted economy," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(4), pages 549-564, September.
    4. Louis-Philippe Rochon & Marc Setterfield, 2011. "Post-Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 7, Edward Elgar Publishing.
    5. Phiri, Andrew, 2016. "Changes in inflation persistence prior and subsequent to the subprime crisis: What are the implications for South Africa?," MPRA Paper 70645, University Library of Munich, Germany.
    6. McKenzie, Rex & Pons-Vignon, Nicolas, 2012. "Volatile Capital Flows and a Route to Financial Crisis in South Africa," MPRA Paper 40119, University Library of Munich, Germany.
    7. Elissa Braunstein & James Heintz, 2008. "Gender bias and central bank policy: employment and inflation reduction," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 173-186.
    8. Chatani, Kazutoshi. & Pedro, Oluwaseun Olufemi., 2014. "The role of central banks in meeting the development and employment challenges : the case of Mozambique," ILO Working Papers 994865563402676, International Labour Organization.
    9. Arby, Muhammad Farooq & Younus, Sayera & Tobgye, Sonam & Dema, Phurpa & Das, Praggya & Shafwath, Aminath & Bhatta, Siddha Raj & Raza, Bilal & Perera, W.S Navin, 2021. "The use of Unconventional Monetary Policy Instruments by South Asian Central Banks," MPRA Paper 119287, University Library of Munich, Germany, revised 01 Apr 2023.
    10. Gerald Epstein, 2005. "Central Banks as Agents of Economic Development," Working Papers wp104, Political Economy Research Institute, University of Massachusetts at Amherst.
    11. Ghassan Dibeh, 2014. "The Political Economy of Monetary Policy in Resource-Rich Arab Economies," Working Papers 896, Economic Research Forum, revised Dec 2014.
    12. Elissa Braunstein, 2013. "Central bank policy and gender," Chapters, in: Deborah M. Figart & Tonia L. Warnecke (ed.), Handbook of Research on Gender and Economic Life, chapter 21, pages 345-358, Edward Elgar Publishing.
    13. Matias Vernengo, 2008. "The Political Economy of Monetary Institutions in Brazil: The Limits of the Inflation-targeting Strategy, 1999-2005," Review of Political Economy, Taylor & Francis Journals, vol. 20(1), pages 95-110.
    14. Muqtada, M., 2010. "The crisis of orthodox macroeconomic policy : the case for a renewed commitment to full employment," ILO Working Papers 994562813402676, International Labour Organization.
    15. James Boyce, 2008. "Post-Conflict Recovery: Resource Mobilization and Peacebuilding," Working Papers wp159, Political Economy Research Institute, University of Massachusetts at Amherst.
    16. 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.
    17. Andrew Phiri, 2016. "Inflation persistence and monetary policy in South Africa: is the 3% to 6% inflation target too persistent?," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 8(2), pages 111-124.
    18. Scott Aquanno & Jordan Brennan, 2016. "The Politics of Canadian Monetary Policy: Reassessing Canadian Inflation, Part II," Journal of Economic Issues, Taylor & Francis Journals, vol. 50(3), pages 814-833, July.
    19. Khoza, Keorapetse & Thebe, Relebogile & Phiri, Andrew, 2016. "Nonlinear impact of inflation on economic growth in South Africa: A smooth transition regression (STR) analysis," MPRA Paper 73840, University Library of Munich, Germany.
    20. Gerald Epstein & James Heintz, 2006. "Monetary Policy and Financial Sector Reform for Employment Creation and Poverty Reduction in Ghana," Research Report 2, International Policy Centre for Inclusive Growth.
    21. Gerald Epstein, 2006. "Central Banks as Agents of Economic Development," WIDER Working Paper Series RP2006-54, World Institute for Development Economic Research (UNU-WIDER).
    22. repec:ilo:ilowps:486556 is not listed on IDEAS

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