IDEAS home Printed from https://ideas.repec.org/p/imk/wpaper/8-2011.html
   My bibliography  Save this paper

Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory

Author

Listed:
  • Thomas I. Palley

Abstract

The financial crisis and Great Recession have prompted a rethink of monetary policy and central banking. The status quo insider rethink focuses on the role of monetary policy in dealing with asset bubbles; making the central bank the banking system supervisor; and how to deal with the problem of the zero lower bound to nominal interest rates. This paper presents an outsider reform program that focuses on central bank governance and independence; reshaping the economic philosophy of central banks to be more intellectually open-minded; major monetary policy reform that includes adoption of an inflation target equal to the minimum unemployment rate of inflation (MURI) and implementation of asset based reserve requirements; and regulatory reform that addresses problems of flawed incentives, excessive leverage, and maturity mismatch.The proposed outsider reform program is rooted in a rethink of macroeconomic theory compelled by the crisis. There are some overlaps between the insider and outsider reform programs but they are more form than substance. That is dangerous because it can confuse debate if similarity of form is mistaken for similarity of substance.The insider program makes no changes to macroeconomic theory and is uncritical of the Federal Reserve's past actions. From its perspective, any failings of the Federal Reserve have been unwitting sins of omission. The outsider program fundamentally challenges existing macroeconomic theory and is also highly critical of the Federal Reserve. From its perspective the failings of the Federal Reserve have included significant sins of commission rooted in political capture, cognitive capture and intellectual hubris.The outsider critique can be taken even further. The Federal Reserve is already legally mandated to pursue maximum employment with price stability. However, it needs institutional transformation that makes it think of itself as an agent for helping realize the "American Dream". That means it should have a duty to shape the allocation of credit and the financial system in ways that ensure growth, full employment and a fair shake for all.

Suggested Citation

  • Thomas I. Palley, 2011. "Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory," IMK Working Paper 8-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:8-2011
    as

    Download full text from publisher

    File URL: http://www.boeckler.de/pdf/p_imk_wp_8_2011.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 879-907.
    2. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2007. "From Bottom to Top: The Entire Distribution of Market Income in Germany, 1992-2001," CEPR Discussion Papers 6251, C.E.P.R. Discussion Papers.
    3. A. B. Atkinson, 2009. "Factor shares: the principal problem of political economy?," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 3-16, Spring.
    4. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," NBER Working Papers 11842, National Bureau of Economic Research, Inc.
    5. Thomas I. Palley, 2010. "Managerial Pay (Cadrisme) and the Post Keynesian Growth Model," IMK Working Paper 9-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    7. Joachim R. Frick & Markus M. Grabka, 2009. "Gestiegene Vermögensungleichheit in Deutschland," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 76(4), pages 54-67.
    8. James Crotty, 2002. "The Effects of Increased Product Market Competition and Changes in Financial Markets on the Performance of Nonfinancial Corporations in the Neoliberal Era," Working Papers wp44, Political Economy Research Institute, University of Massachusetts at Amherst.
    9. Lucian Bebchuk, 2005. "The Growth of Executive Pay," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 283-303, Summer.
    10. Harrison, Ann, 2005. "Has Globalization Eroded Labor’s Share? Some Cross-Country Evidence," MPRA Paper 39649, University Library of Munich, Germany.
    11. Petra Dünhaupt & Eckhard Hein & Till van Treeck, 2007. "Finanzsystem und wirtschaftliche Entwicklung: Tendenzen in den USA und in Deutschland aus makroökonomischer Perspektive," IMK Studies 05-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    12. Bentolila Samuel & Saint-Paul Gilles, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-33.
    13. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
    14. Marc Lavoie, 2009. "Cadrisme within a Post-Keynesian Model of Growth and Distribution," Review of Political Economy, Taylor & Francis Journals, vol. 21(3), pages 369-391.
    15. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    16. Stefan Bach & Giacomo Corneo & Viktor Steiner, 2009. "From Bottom To Top: The Entire Income Distribution In Germany, 1992-2003," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(2), pages 303-330, June.
    17. Paul Gomme & Peter Rupert, 2004. "Measuring labor’s share of income," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Nov.
    18. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. [A&C] Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory
      by Lorenzo Battisti in Pensieri Economici on 2013-05-29 16:03:00

    Citations

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


    Cited by:

    1. Guillermo Gigliani, 2014. "The Reform of the Federal Reserve in 2008: Is the Money Supply Endogenous or Exogenous?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 73-94.
    2. Dongkoo Chang & Choon-Seng Lim, Vincent & Eufrocinio M. Bernabe, Jr., "undated". "Alternative Monetary Policy Frameworks for Price and Financial Stability," Working Papers wp06, South East Asian Central Banks (SEACEN) Research and Training Centre.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    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:imk:wpaper:8-2011. 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: (Sabine Nemitz). General contact details of provider: http://edirc.repec.org/data/imkhbde.html .

    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.