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

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  • L. Randall Wray

Abstract

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.

Suggested Citation

  • L. Randall Wray, 2007. "A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate," Economics Working Paper Archive wp_510, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_510
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    References listed on IDEAS

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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 416-433, November.
    2. Marc Lavoie, 2002. "Interest parity, risk premia, and Post Keynesian analysis," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 25(2), pages 237-249.
    3. Dimitri B. Papadimitriou & L. Randall Wray, "undated". "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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    Cited by:

    1. Hiroshi Nishi, 2014. "Varieties of economic growth regimes, types of macroeconomic policies and policy regimes: a post-Keynesian analysis," Chapters,in: Economic Crises and Policy Regimes, chapter 5, pages 101-123 Edward Elgar Publishing.
    2. repec:bla:metroe:v:68:y:2017:i:3:p:500-548 is not listed on IDEAS
    3. 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.
    4. Mark Setterfield, 2014. "Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(70), pages 7-22, June.
    5. 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.
    6. 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.
    7. Soon Ryoo & Peter Skott, 2017. "Fiscal and Monetary Policy Rules in an Unstable Economy," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 500-548, July.
    8. Eric Tymigne, 2011. "Financial stability, regulatory buffers and economic growth after the Great Recession: some regulatory implications," Chapters,in: Financial Instability and Economic Security after the Great Recession, chapter 6, pages 114-140 Edward Elgar Publishing.
    9. Josh Ryan-Collins, 2015. "Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75," Economics Working Paper Archive wp_848, Levy Economics Institute.
    10. 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.
    11. Stephen Dunn, 2011. "Was Galbraith Right?," Challenge, Taylor & Francis Journals, vol. 54(6), pages 41-60.
    12. repec:elg:ejeepi:v:14:y:2017:i:2:p131-172 is not listed on IDEAS
    13. Angel Asensio, 2009. "Between the cup and the lip," Working Papers halshs-00496911, HAL.
    14. Emiliano Brancaccio & Giuseppe Fontana, 2013. "'Solvency rule' versus 'Taylor rule': an alternative interpretation of the relation between monetary policy and the economic crisis," Cambridge Journal of Economics, Oxford University Press, vol. 37(1), pages 17-33.
    15. Jairo Parada Corrales & Cristina Albor Cepeda, 2011. "La mitología del banco central independiente," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 13(24), pages 465-472, January-J.
    16. Noemi Levy Orlik, 2012. "The Effect of Interest Rates in Developing Countries: Can Central Bank Monetary Policy Instruments Modify Economic Growth?," Chapters,in: Employment, Growth and Development, chapter 12 Edward Elgar Publishing.
    17. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.

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