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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)

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

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Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA. [Downloadable!]
  2. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Blackwell Publishing, vol. 7(1), pages 129-136, 03. [Downloadable!] (restricted)
  3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Joerg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute, The. [Downloadable!]
  5. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16. [Downloadable!]
  6. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Blackwell Publishing, vol. 7(1), pages 117-127, 03. [Downloadable!] (restricted)
  7. Dimitri B. Papadimitriou & L. Randall Wray, 1999. "Flying Blind: The Federal Reserve's Experiment with Unobservables," Macroeconomics 9903011, EconWPA. [Downloadable!]
  8. L. Randall Wray, 2004. "The Case for Rate Hikes: Did the Fed Prematurely Raise Rates?," Economics Public Policy Brief Archive ppb79, Levy Economics Institute, The. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. Canale, R.R., 2008. "Central bank reaction to public deficit and sound public finance: the case of the European Monetary Union," MPRA Paper 8789, University Library of Munich, Germany. [Downloadable!]
  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. [Downloadable!]
  4. 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. [Downloadable!]
  5. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560_v1, HAL. [Downloadable!]
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