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Interest rates, income distribution, and monetary policy dominance: Post Keynesians and the "fair rate" of interest

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  • Louis-Philippe Rochon
  • Mark Setterfield

Abstract

In light of the growing interest in "new consensus" models, this paper examines Post Keynesian alternatives to the Taylor rule. It identifies two distinctive approaches to Post Keynesian interest rate policy, which we label the activist and the parking-it rules. The first approach advocates the use of nominal (or real) interest rates as a tool of aggregate demand fine-tuning, whereas the second approach moves away from reaction functions, claiming that monetary policy has become too dominant in economic discourse. It proposes, instead, an interest rate policy whereby the central bank "parks" the interest rate (real or nominal) according to a specific rule. Three possible parking rules are examined—the Smithin rule, the Kansas City rule, and the Pasinetti fair rate rule. The paper then explores the macroeconomic consequences of a genuine Post Keynesian alternative to new consensus monetary policy along the lines of the fair rate rule.

Suggested Citation

  • Louis-Philippe Rochon & Mark Setterfield, 2007. "Interest rates, income distribution, and monetary policy dominance: Post Keynesians and the "fair rate" of interest," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 13-42.
  • Handle: RePEc:mes:postke:v:30:y:2007:i:1:p:13-42
    DOI: 10.2753/PKE0160-3477300101
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    Citations

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    Cited by:

    1. Eckhard Hein & Achim Truger, 2011. "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," Chapters,in: Credit, Money and Macroeconomic Policy, chapter 12 Edward Elgar Publishing.
    2. Eckhard Hein & Achim Truger & Till van Treeck, 2011. "The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective," IMK Working Paper 9-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Eckhard Hein, 2017. "Stagnation policy in the Eurozone and economic policy alternatives: A Steindlian/neo-Kaleckian perspective," Working Papers 10/17, Sapienza University of Rome, DISS.
    4. Eckhard Hein & Achim Truger, 2014. "Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 21-38, Februar.
    5. Theodore T. Koutsobinas, 2011. "From Monetary to Fiscal Policy Rule: A Matter of Adjustment or Choice?," Chapters,in: Credit, Money and Macroeconomic Policy, chapter 4 Edward Elgar Publishing.
    6. repec:elg:ejeepi:v:14:y:2017:i:2:p131-172 is not listed on IDEAS
    7. Angel Asensio, 2009. "Between the cup and the lip," Working Papers halshs-00496911, HAL.
    8. Eckhard Hein & Marc Lavoie & Till van Treeck, 2011. "Some instability puzzles in Kaleckian models of growth and distribution: a critical survey," Cambridge Journal of Economics, Oxford University Press, vol. 35(3), pages 587-612.
    9. Eckhard Hein, 2017. "Stagnation policy in the Eurozone and economic policy alternatives," FMM Working Paper 05-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. 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.
    11. Hiroshi Nishi, 2014. "Varieties of economic growth regimes, types of macroeconomic policies and policy regimes: a post-Keynesian analysis," Chapters,in: Economic Crises and Policy Regimes, chapter 5, pages 101-123 Edward Elgar Publishing.
    12. Louis-Philippe Rochon & Marc Setterfield, 2011. "Post-Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation," Chapters,in: Credit, Money and Macroeconomic Policy, chapter 7 Edward Elgar Publishing.
    13. Soon Ryoo & Peter Skott, 2017. "Fiscal and Monetary Policy Rules in an Unstable Economy," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 500-548, July.
    14. Eckhard Hein & Daniel Detzer, 2014. "Coping with imbalances in the Euro area: Policy alternatives addressing divergences and disparities between member countries," Working papers wpaper63, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    15. Eckhard Hein, 2012. "The Macroeconomics of Finance-Dominated Capitalism – and its Crisis," Books, Edward Elgar Publishing, number 14931, April.
    16. Hein, Eckhard & Truger, Achim, 2013. "Future fiscal and debt policies: Germany in the Context of the European Monetary Union," IPE Working Papers 24/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    17. Jussi Ahokas, 2012. "Geographies of Monetary Economy and the European economic crisis," ERSA conference papers ersa12p437, European Regional Science Association.
    18. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.
    19. Noemi Levy Orlik, 2012. "The Effect of Interest Rates in Developing Countries: Can Central Bank Monetary Policy Instruments Modify Economic Growth?," Chapters,in: Employment, Growth and Development, chapter 12 Edward Elgar Publishing.
    20. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.
    21. repec:mes:postke:v:35:y:2012:i:2:p:187-213 is not listed on IDEAS
    22. Eckhard Hein & Achim Truger, 2012. "Finance-dominated capitalism in crisis—the case for a global Keynesian New Deal," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(2), pages 187-213.
    23. Angel Asensio, 2012. "Between the Cup and the Lip: On Post Keynesian Interest Rate Rules and Long-term Interest Rate Management," Chapters,in: Monetary Policy and Central Banking, chapter 1 Edward Elgar Publishing.
    24. Leonardo Vera, 2014. "The Simple Post-Keynesian Monetary Policy Model: An Open Economy Approach," Review of Political Economy, Taylor & Francis Journals, vol. 26(4), pages 526-548, October.
    25. Greg Hannsgen & Tai Young-Taft, 2015. "Inside Money in a Kaldor-Kalecki-Steindl Fiscal Policy Model: The Unit of Account, Inflation, Leverage, and Financial Fragility," Economics Working Paper Archive wp_839, Levy Economics Institute.

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