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Monetary and budgetary-fiscal policy interactions in a Keynesian context: revisiting macroeconomic governance

  • Angel Asensio

    ()

    (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)

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    Because it was designed for efficient stationary regimes, the New-Consensus Macroeconomic governance carries several drawbacks when implemented in Keynesian non-ergodic regimes. As long as Keynesian unemployment is interpreted in terms of 'natural' rate, it serves as a macroeconomic policy target in such a way that the policy mix may anchor the system far from full employment. We develop an argument that suggests a Keynesian explanation (which involves inappropriate economic policy) of what New Keynesians have referred to as unemployment hysteresis. However, difficulties do not vanish when authorities adopt the Keynesian vision of the world, for policy makers also have to deal with uncertainty. In contrast with the automatic economic-policy rules of the New Consensus Macroeconomics (NCM), we put forward a Keynesian pragmatic and progressive approach, based on intermediate targets designed with respect to the confidence that authorities have in the chances of success (which depends on the context and moves with it). Monetary and budgetary-fiscal policy interactions are discussed in such a context. Even if the monetary policy ability to reduce interest rates and increase effective demand is doubtful, it matters indirectly through avoiding increases in interest rates when fiscal and budgetary policy aims to stimulate effective demand.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/13/90/29/PDF/keynesian_macroecon_governance.PDF
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    Paper provided by HAL in its series Post-Print with number halshs-00139029.

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    Date of creation: Oct 2005
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    Publication status: Published - Presented, Macroeconomics and macroeconomic policies - alternatives to the orthodoxy, 9th workshop of the research network Alternative Macroeconomic Policies, 2005, Berlin, Germany
    Handle: RePEc:hal:journl:halshs-00139029
    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00139029/en/
    Contact details of provider: Web page: http://hal.archives-ouvertes.fr/

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    1. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
    2. Philip Arestis & Malcolm Sawyer, 2003. "Reinventing fiscal policy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(1), pages 3-25, October.
    3. Philip Arestis & Malcolm Sawyer, 2003. "Inflation Targeting: A Critical Appraisal," Macroeconomics 0309015, EconWPA.
    4. David Romer, 2000. "Keynesian Macroeconomics without the LM Curve," NBER Working Papers 7461, National Bureau of Economic Research, Inc.
    5. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
    6. Marc Lavoie, 2006. "A Post-Keynesian Amendment To The New Consensus On Monetary Policy," Metroeconomica, Wiley Blackwell, vol. 57(2), pages 165-192, 05.
    7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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