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A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate

  • L. Randall Wray

This paper addresses three issues surrounding monetary policy formation: policy independence, choice of operating targets, and rules versus discretion. According to the New Monetary Consensus, the central bank needs policy independence to build credibility; the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. This paper provides an alternative view, arguing that an effective central bank cannot be independent as conventionally defined, where effectiveness is indicated by ability to hit an overnight nominal interest rate target. Discretionary policy is rejected, as are conventional views of the central bank's ability to achieve traditional goals such as robust growth, low inflation, and high employment. Thus, the paper returns to Keynes's call for low interest rates and euthanasia of the rentier.

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File URL: http://www.levyinstitute.org/pubs/wp_510.pdf
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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_510.

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Date of creation: Aug 2007
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Handle: RePEc:lev:wrkpap:wp_510
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. Cottrell, Allin, 1994. "Keynes and the Keynesians on the Fisher Effect," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(4), pages 416-33, November.
  2. Marc Lavoie, 2002. "Interest parity, risk premia, and Post Keynesian analysis," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(2), pages 237-249, December.
  3. Dimitri B. Papadimitriou & L. Randall Wray, . "Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component," Economics Public Policy Brief Archive ppb_27, Levy Economics Institute.
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