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Are Long-Run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?

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Author Info

  • Giuseppe Fontana

    (University of Leeds, UK)

  • Alfonso Palacio- Vera

    (Universidad Complutense de Madrid, Spain)

Abstract

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long- run price stability—i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0511024.

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Date of creation: 23 Nov 2005
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Handle: RePEc:wpa:wuwpma:0511024

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Web page: http://128.118.178.162

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Keywords: monetary policy; new consensus; path dependency; opportunistic approach;

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References

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  1. Dimitri B. Papadimitriou & L. Randall Wray, 1994. "Flying Blind: The Federal Reserve's Experiment with Unobservables," Economics Working Paper Archive wp_124, Levy Economics Institute.
  2. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 129-136, 03.
  3. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA.
  4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  5. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
  6. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, 03.
  7. Jorg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute.
  8. L. Randall Wray, 2004. "The Case for Rate Hikes: Did the Fed Prematurely Raise Rates?," Economics Public Policy Brief Archive ppb_79, Levy Economics Institute.
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Cited by:
  1. Rosaria Rita Canale, 2010. "Central Bank Reaction to Public Deficit and Sound Public Finance: The Case of the European Monetary Union," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 4-17, June.
  2. Mariano Beltrani & Juan Cuattromo, 2012. "Redefining Monetary Policy Limits: Towards an Expansion of its Role in Economic Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(67), pages 121-168, December.
  3. Eckhard Hein & Lena Vogel, 2007. "Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA," IMK Working Paper 03-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  4. repec:hal:wpaper:halshs-00496911 is not listed on IDEAS
  5. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.
  6. Eckhard Hein & Achim Truger, 2008. "Fiscal policy in the macroeconomic policy mix: A Critique of the New Consensus Model and a comparison of macroeconomic policies in France, Germany, the UK and Sweden from a Post-Keynesian perspective," IMK Working Paper 03-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  7. Canale, Rosaria Rita & Napolitano, Oreste, 2010. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 24705, University Library of Munich, Germany.
  8. 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.
  9. Hein, Eckhard & Schoder, Christian, 2009. "Interest rates, distribution and capital accumulation – A Post-Kaleckian perspective on the US and Germany," MPRA Paper 18223, University Library of Munich, Germany.
  10. Kai D. Schmid, 2010. "Medium-run macrodynamics and the consensus view of stabilization policy," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 322/2010, Department of Economics, University of Hohenheim, Germany.
  11. Geoff C. Harcourt & Peter Kriesler & John Nevilet, 2013. "Why myths in neoclassical economics threaten the world economy: a post-Keynesian Manifesto," Discussion Papers 2013-36, School of Economics, The University of New South Wales.

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