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Alternative Strategies for Monetary Policy

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  • Rosaria Rita Canale

Abstract

The aim of the paper is to emphasize the importance of the central bank's alternative strategies for macroeconomic equilibrium. Using a constrained maximization process founded on a behavioural equation, we underscore the relevance, for monetary policy, of the assumptions adopted by policymakers regarding how the economic system works. In particular, under a flexible exchange rate regime, the relevant hypotheses are those concerning the supply curve. Under a fixed exchange rate regime the relevant assumptions are those related to the maintenance of the currency agreements and to the internal sustainability of an interest rate setting policy. We demonstrate that these hypotheses define the objective pursued and the strategy followed. Furthermore, if they do not coincide with the actual characteristics of the market, the adjustment dynamics of aggregate income and inflation do not allow convergence toward equilibrium. We use the tools of New Consensus Macroeconomics to discuss the implications of the model and to offer an enhanced analytical framework for teaching intermediate macroeconomics without necessarily adopting the mainstream hypotheses.

Suggested Citation

  • Rosaria Rita Canale, 2011. "Alternative Strategies for Monetary Policy," Review of Political Economy, Taylor & Francis Journals, vol. 23(4), pages 557-571, October.
  • Handle: RePEc:taf:revpoe:v:23:y:2011:i:4:p:557-571
    DOI: 10.1080/09538259.2011.611622
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