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Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities

  • Mark Setterfield

    ()

This paper discusses central banks’ use of the interest rate as the instrument of monetary policy, in light of a reconsideration of macroeconomic theory induced by the financial crisis and Great Recession. Three main guiding principles for the future conduct of interest rate policy are identified: beware real effects; beware positive feedbacks; and beware discontinuities. The paper also reflects on the use of policy targets as a “quasi-instrument” of stabilization policy.

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File URL: http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-20.pdf
File Function: First version, 2013
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Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1320.

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Length: 7 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:tri:wpaper:1320
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Web page: http://www.trincoll.edu/Academics/MajorsAndMinors/Economics/Pages/default.aspx

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  1. Olivier Jean Blanchard & Jordi Galí, 2005. "Real wage rigidities and the New Keynesian model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 807-828, July.
  3. Setterfield, Mark, 2007. "The rise, decline and rise of incomes policies in the US during the post-war era: an institutional-analytical explanation of inflation and the functional distribution of income," Journal of Institutional Economics, Cambridge University Press, vol. 3(02), pages 127-146, August.
  4. Setterfield, Mark & Kim, Yun K., 2016. "Debt servicing, aggregate consumption, and growth," Structural Change and Economic Dynamics, Elsevier, vol. 36(C), pages 22-33.
  5. Thomas I. Palley, 2002. "Economic contradictions coming home to roost? Does the U.S. economy face a long-term aggregate demand generation problem?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(1), pages 9-32, January.
  6. Barry Cynamon & Steven Fazzari, 2013. "Rising inequality, recession and slow recovery: A sad American tale," Intereconomics- Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 48(6), pages 379-380, November.
  7. Coibion, Olivier & Gorodnichenko, Yuriy & Koustas, Dmitri, 2013. "Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence," IZA Discussion Papers 7715, Institute for the Study of Labor (IZA).
  8. L. Randall Wray, 2007. "A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(1), pages 119-141, October.
  9. Gilberto Tadeu Lima & Mark Setterfield, 2011. "The Cost Channel of Monetary Policy in a Post Keynesian Macrodynamic Model of Inflation and Output Targeting," Working Papers 1102, Trinity College, Department of Economics.
  10. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  11. Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
  12. Gilberto Tadeu Lima & Mark Setterfield, 2008. "Inflation targeting and macroeconomic stability in a Post Keynesian economy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(3), pages 435-461, April.
  13. Jon D. Wisman, 2012. "Wage Stagnation, Rising Inequality and the Financial Crisis of 2008," Working Papers 2012-01, American University, Department of Economics.
  14. Cynamon Barry Z. & Fazzari Steven M., 2008. "Household Debt in the Consumer Age: Source of Growth--Risk of Collapse," Capitalism and Society, De Gruyter, vol. 3(2), pages 1-32, October.
  15. Mercedes Marcó del Pont, 2013. "Introduction: the role of central banks in economic development with an emphasis on the recent Argentinean experience," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(3), pages 267-272, January.
  16. Mark Setterfield, 2006. "Balancing the Macroeconomic Books on the Backs of Workers: A Simple Analytical Political Economy Model of Contemporary U.S. Capitalism," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 35(3), pages 46-63, November.
  17. Feldstein, Martin, 2010. "U.S. growth in the decade ahead," Journal of Policy Modeling, Elsevier, vol. 32(5), pages 610-614, September.
  18. Esteban Pérez Caldentey & Matías Vernengo, 2013. "Is Inflation Targeting Operative in an Open Economy Setting?," Working Papers wp324, Political Economy Research Institute, University of Massachusetts at Amherst.
  19. Gilberto Tadeu Lima & Mark Setterfield, 2010. "Pricing Behaviour and the Cost-Push Channel of Monetary Policy," Review of Political Economy, Taylor & Francis Journals, vol. 22(1), pages 19-40.
  20. Gilberto Tadeu Lima & Mark Setterfield, Jaylson Jair da Silveira, 2013. "Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations," Working Papers, Department of Economics 2013_11, University of São Paulo (FEA-USP).
  21. Martin S. Feldstein, 2010. "U.S. Growth in the Decade Ahead," NBER Working Papers 15685, National Bureau of Economic Research, Inc.
  22. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 339-364, 07.
  23. Yun Kim & Mark Setterfield & Yuan Mei, 2013. "A Theory of Aggregate Consumption," Working Papers 1301, Trinity College, Department of Economics.
  24. Mark Setterfield, 2006. "Is inflation targeting compatible with Post Keynesian economics?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(4), pages 653-671, July.
  25. Barry Cynamon & Steven Fazzari & Mark Setterfield, 2013. "How the Great Moderation Became a (Contained) Depression and What to Do About It," Working Papers 1303, Trinity College, Department of Economics.
  26. Aldo Barba & Massimo Pivetti, 2009. "Rising household debt: Its causes and macroeconomic implications--a long-period analysis," Cambridge Journal of Economics, Oxford University Press, vol. 33(1), pages 113-137, January.
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