IDEAS home Printed from
   My bibliography  Save this article

Is inflation targeting compatible with Post Keynesian economics?




The purpose of this paper is to show that inflation targeting is compatible with Post Keynesian economics, but only if the policies used to achieve the inflation target explicitly acknowledge (1) the demand-determined nature of the real income generating process, and (2) the importance of conflicting claims over the distribution of income for determining the rate of inflation. The paper then questions whether or not policy makers should trouble to engage in inflation targeting. It is shown that there does exist a Post Keynesian case for inflation targeting, but that the appropriate inflation target that emerges from Post Keynesian economics suggests that far too much attention is currently being paid to inflation and that more of policy makers' attention should be devoted to output (and, by extension, employment) targeting.

Suggested Citation

  • Mark Setterfield, 2006. "Is inflation targeting compatible with Post Keynesian economics?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 28(4), pages 653-671.
  • Handle: RePEc:mes:postke:v:28:y:2006:i:4:p:653-671
    DOI: 10.2753/PKE0160-3477280407

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Nelson, Edward & Nikolov, Kalin, 2003. "UK inflation in the 1970s and 1980s: the role of output gap mismeasurement," Journal of Economics and Business, Elsevier, vol. 55(4), pages 353-370.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    4. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
    5. Christopher Martin & Costas Milas, 2004. "Modelling Monetary Policy: Inflation Targeting in Practice," Economica, London School of Economics and Political Science, vol. 71(281), pages 209-221, May.
    6. Muscatelli, V Anton & Tirelli, Patrizio & Trecroci, Carmine, 2002. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries," Manchester School, University of Manchester, vol. 70(4), pages 487-527, Special I.
    7. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    8. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    9. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    10. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    11. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, January.
    12. Mehtap Kesriyeli & Denise R. Osborn & Marianne Sensier, 2004. "Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany," Working Papers 0414, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    13. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
    14. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    15. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    16. King, Robert G. & Wolman, Alexander L., 2013. "Inflation Targeting in a St. Louis Model of the 21st Century," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-574.
    17. Mihailov, Alexander, 2005. "Has more Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics," Economics Discussion Papers 8894, University of Essex, Department of Economics.
    18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    19. Wicksell, Knut, 1907. "The Influence of the Rate of Interest on Prices," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 17, pages 213-220.
    20. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Jesús Ferreiro & Carmen Gómez, 2014. "Implementing a Voluntary Wage Policy: Lessons from the Irish and Spanish Wages Policies before the Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 107-127, Februar.
    2. Esteban Pérez Caldentey & Matías Vernengo, 2013. "Is inflation targeting operative in an open economy setting?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(3), pages 347-369, January.
    3. Ohno, Takashi, 2014. "The role of the Taylor principle in the neo-Kaleckian model when applied to an endogenous market structure," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 32-42.
    4. Porcile, Gabriel & de Souza, Alexandre Gomes & Viana, Ricardo, 2011. "External debt sustainability and policy rules in a small globalized economy," Structural Change and Economic Dynamics, Elsevier, vol. 22(3), pages 269-276, September.
    5. Modenesi, Rui Lyrio & Modenesi, André de Melo & Martins, Norberto Montani & Fontaine, Patrick, 2015. "Restructuring the Economic Policy Framework in Brazil: Genuine or Gattopardo change?," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 17.
    6. Alexandre Manir Figueiredo Sarquis & José Luis Oreiro, 2011. "A Stock and FlowConsistent Post Keynesian Model for an Open Economy with ImportedIntermediary Inputs and Ex-Ante Portfolio Allocation," Anais do XXXVII Encontro Nacional de Economia [Proceedings of the 37th Brazilian Economics Meeting] 53, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Eckhard Hein & Christian Schoder, 2011. "Interest rates, distribution and capital accumulation -- A post-Kaleckian perspective on the US and Germany," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(6), pages 693-723, November.
    8. Anthony Kyereboah-Coleman, 2012. "Inflation targeting and inflation management in Ghana," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(1), pages 25-40, April.
    9. Mark Setterfield, 2014. "Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(70), pages 7-22, June.
    10. Gilberto Tadeu Lima & Mark Setterfield & Jaylson Jair da Silveira, 2014. "Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(2), pages 255-279, December.
    11. Gabriel Porcile & Alexandre C.Gomes de Souza & Ricardo Viana, 2008. "Developing Countries in Times of Globalization: A Kaleckian-Minskyan Macro-Model," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807180125330, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    12. Hein, Eckhard, 2016. "Post-Keynesian macroeconomics since the mid-1990s: Main developments," IPE Working Papers 75/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    13. Carlos Carrasco & Jesus Ferreiro, 2013. "Inflation targeting in Mexico," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(3), pages 341-372.
    14. Eduardo F. Bastian & Mark Setterfield, 2017. "Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda," Working Papers 1720, New School for Social Research, Department of Economics.
    15. Montes, Gabriel Caldas, 2009. "Política monetária, inflação e crescimento econômico: a influência da reputação da autoridade monetária sobre a economia," Revista Economia e Sociedade, Instituto de Economia, Universidade Estadual de Campinas (UNICAMP), vol. 37, pages 1-23, August.
    16. Marcelo de Oliveira Passos & José Luís Oreiro, 2008. "A post Keynesian macrodynamic simulation model for an open economy," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211235250, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    17. Jan Korda, 2011. "Monetární nerovnováha v teorii endogenních peněz
      [Monetary Disequilibrium in the Theory of Endogenous Money]
      ," Politická ekonomie, University of Economics, Prague, vol. 2011(5), pages 680-705.
    18. Jan Korda, 2010. "Komparace nového konsensu jako teoretického rámce cílování inflace s postkeynesovskou ekonomií
      [A Comparison of New Consensus as a Theoretical Framework of Inflation Targeting with Post-Keynesian E
      ," Politická ekonomie, University of Economics, Prague, vol. 2010(1), pages 92-104.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mes:postke:v:28:y:2006:i:4:p:653-671. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.