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Macroeconomics and monetary policy: competing theoretical frameworks

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  • Thomas Palley

Abstract

There is widespread agreement that monetary policy matters, but there is disagreement about how policy should be conducted. Behind this disagreement lies differences in theoretical understandings. The paper contrasts the new classical, neo-Keynesian, and Post Keynesian frameworks, thereby surfacing the differences. The new classical model has policy affecting only long-run inflation. The neo-Keynesian model has policy affecting inflation, unemployment, and real wages. The Post Keynesian model also affects growth, so policy implicitly picks a quadruple. Inflation targeting is a suboptimal policy frame because it biases decisions toward low inflation by obscuring the fact that policy also affects unemployment, real wages, and growth.

Suggested Citation

  • Thomas Palley, 2007. "Macroeconomics and monetary policy: competing theoretical frameworks," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 61-78.
  • Handle: RePEc:mes:postke:v:30:y:2007:i:1:p:61-78
    DOI: 10.2753/PKE0160-3477300103
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    Citations

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    Cited by:

    1. Angel Asensio, 2009. "Between the cup and the lip," Working Papers halshs-00496911, HAL.
    2. Nyorekwa, Enock Twinoburyo & Odhiambo, Nicholas Mbaya, 2016. "Monetary policy and economic growth in Kenya:The role of money supply and interest rates," Working Papers 20712, University of South Africa, Department of Economics.
    3. Thomas I. Palley, 2008. "Macroeconomics without the LM: A Post-Keynesian Perspective," IMK Working Paper 13-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Asensio, Angel & Charles, Sébastien & Lang, Dany & Le Heron, Edwin, 2011. "Les développements récents de la macroéconomie post-keynésienne," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 10.
    5. repec:bla:metroe:v:68:y:2017:i:3:p:500-548 is not listed on IDEAS
    6. 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.
    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. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.
    9. 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.
    10. Soon Ryoo & Peter Skott, 2017. "Fiscal and Monetary Policy Rules in an Unstable Economy," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 500-548, July.
    11. 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.
    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. Codrina Rada, 2009. "Introducing Demographic Changes in a Model of Economic Growth and Income Distribution," Working Paper Series, Department of Economics, University of Utah 2009_01, University of Utah, Department of Economics.
    14. Kemp-Benedict, Eric, 2014. "Shifting to a Green Economy: Lock-in, Path Dependence, and Policy Options," MPRA Paper 60175, University Library of Munich, Germany.

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