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What have central bankers learned from modern macroeconomic theory?

  • Howitt, Peter

In this essay I argue that modern macroeconomic theory has fallen behind the practice of central banking. After briefly summarizing the current state of macro theory, I focus on what strikes me as the two most important developments in monetary policy in the last two decades – inflation targeting and dealing with financial crises. My analysis rejects the claims made by several authors to the effect that the proliferation of inflation-targeting regimes around the globe represents an application of well-established principles of macroeconomic theory. As for how monetary policy can promote financial stability, a subject on which most economists agree modern theory has been of little help, I argue that macroeconomics has lost touch with the fundamental raison d’être of central banking. My diagnosis is that macroeconomic theory has become distracted by its preoccupation with states of equilibrium, a preoccupation that inhibits analysis of a market economy’s coordination mechanisms. I conclude with a plea for a more diverse ecology of approaches to macroeconomic theory, one that finds room for agent-based computational economics as well as for more conventional equilibrium theories.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 1 ()
Pages: 11-22

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:11-22
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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