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Inflation Targeting: A Critical Approach

  • Philip Arestis

    ()

    (Cambridge University)

A New Consensus in Macroeconomics (NCM) has emerged over the past couple of decades or so, which has become highly influential in terms of current thinking on the macroeconomy and of economic policy, especially monetary policy. Its main implication for economic policy has been the implementation of inflation targeting (IT). This paper critically raises a number of issues with both the NCM’s theoretical foundations, as well as with the IT framework. On both accounts, we find a number of problems and weaknesses, which emanate from the absence of money and banks, and from the way the equilibrium real rate of interest is utilized in the NCM model. This suggests that a great deal more research is necessary and very different economic policies than what is suggested by the NCM theoretical framework are necessary to tackle the issues raised in this contribution.

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File URL: http://www.bcra.gov.ar/pdfs/investigaciones/68_Arestis.pdf
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Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

Volume (Year): 1 (2013)
Issue (Month): 68 (June)
Pages: 7-21

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Handle: RePEc:bcr:ensayo:v:1:y:2013:i:68:p:7-21
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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
  3. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
  4. Philip Arestis & Georgios E Chortareas, 2008. "Atheoretical and Theory-Based Approaches to the Natural Equilibrium Real Interest Rate," Eastern Economic Journal, Palgrave Macmillan, vol. 34(3), pages 390-405.
  5. Alvaro Angeriz & Philip Arestis, 2008. "Assessing inflation targeting through intervention analysis," Oxford Economic Papers, Oxford University Press, vol. 60(2), pages 293-317, April.
  6. Juselius, Mikael, 2008. "Testing the New Keynesian Model on U.S. and Euro Area Data," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2, pages 1-26.
  7. Alvaro Angeriz & Philip Arestis, 2009. "The consensus view on interest rates and fiscal policy: reality or innocent fraud?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 31(4), pages 567-586, July.
  8. Willem H. Buiter, 2008. "Central banks and financial crises," LSE Research Online Documents on Economics 24438, London School of Economics and Political Science, LSE Library.
  9. Philip Arestis & Malcolm Sawyer, 2008. "A critical reconsideration of the foundations of monetary policy in the new consensus macroeconomics framework," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 761-779, September.
  10. Alvaro Angeriz & Philip Arestis, 2007. "Monetary policy in the UK," Cambridge Journal of Economics, Oxford University Press, vol. 31(6), pages 863-884, November.
  11. Axel A. Weber & Wolfgang Lemke & Andreas Worms, 2008. "How useful is the concept of the natural real rate of interest for monetary policy?," Cambridge Journal of Economics, Oxford University Press, vol. 32(1), pages 49-63, January.
  12. Philip Arestis, 2009. "New Consensus Macroeconomics: A Critical Appraisal," Economics Working Paper Archive wp_564, Levy Economics Institute.
  13. Philip Arestis & Michelle Baddeley & Malcolm Sawyer, 2007. "The Relationship Between Capital Stock, Unemployment And Wages In Nine Emu Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 59(2), pages 125-148, 04.
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