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Alternatives to Inflation Targeting Monetary Policy for Stable and Egalitarian Growth: A Brief Research Summary

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  • Gerald Epstein

Abstract

Many countries in the developing world have adopted an approach to monetary policy that focuses on maintaining a low level of inflation, to the exclusion of other important objectives such as employment generation, increasing investment or reducing poverty, despite the widespread evidence that moderate levels of inflation have few or no costs. Some have even adopted formal “inflation targeting”, an approach which commits the central bank to hitting a fairly rigid inflation target, often as low as 2%. However, this focus has led to slower economic growth and lower employment growth, without succeeding in lowering inflation at a smaller economic cost than traditional methods of inflation fighting. Clearly, it is time to find an alternative to inflation targeting. This paper presents the real targeting approach to monetary policy, which I argue is superior alternative to the costly and ineffective inflation targeting approach. Under this real targeting approach, central banks are given a country appropriate target such as employment growth, unemployment, real GDP or investment, usually subject to an inflation constraint. Given these two targets – the real target and the constraint – the central bank will find multiple tools to reach these targets, designing new tools and rediscovering old tools such as asset based reserve requirements and other credit allocation techniques. The real targeting approach might also be complemented by other policies, such as capital management techniques to deal with possible capital flight. The real targeting approach has the potential to make central bank policy more transparent, more accountable, and more socially useful than most currently existing central bank structures.

Suggested Citation

  • Gerald Epstein, 2003. "Alternatives to Inflation Targeting Monetary Policy for Stable and Egalitarian Growth: A Brief Research Summary," Working Papers wp62, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp62
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    References listed on IDEAS

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    1. Baker,Dean & Epstein,Gerald & Pollin,Robert (ed.), 1998. "Globalization and Progressive Economic Policy," Cambridge Books, Cambridge University Press, number 9780521643764, October.
    2. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
    3. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
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    Cited by:

    1. James Boyce, 2008. "Post-Conflict Recovery: Resource Mobilization and Peacebuilding," Working Papers wp159, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Stephanie Seguino, 2005. "Gender Inequality in a Globalizing World," Economics Working Paper Archive wp_426, Levy Economics Institute.
    3. James Heintz & Gerald Epstein, 2006. "Monetary Policy and Financial Sector Reform For Employment Creation and Poverty Reduction in Ghana," Working Papers wp113, Political Economy Research Institute, University of Massachusetts at Amherst.
    4. Faul, Joseph & Khumalo, Bridgette & Pashe, Mpho & Khuzwayo, Miranda & Banda, Kamogelo & Jali, Senzo & Myeni, Bathandekile & Pule, Retlaodirela & Mosito, Boitshoko & Jack, Lona-u-Thando & Phiri, Andrew, 2014. "Is South Africa's inflation target too persistent for monetary policy conduct?," MPRA Paper 58233, University Library of Munich, Germany.
    5. Ayşe Özden Birkan, 2012. "Inflation targeting in an import dependent indebted economy," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(4), pages 549-564, September.
    6. Matias Vernengo, 2008. "The Political Economy of Monetary Institutions in Brazil: The Limits of the Inflation-targeting Strategy, 1999-2005," Review of Political Economy, Taylor & Francis Journals, vol. 20(1), pages 95-110.
    7. Khoza, Keorapetse & Thebe, Relebogile & Phiri, Andrew, 2016. "Nonlinear impact of inflation on economic growth in South Africa: A smooth transition regression (STR) analysis," MPRA Paper 73840, University Library of Munich, Germany.
    8. 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.
    9. Phiri, Andrew, 2016. "Changes in inflation persistence prior and subsequent to the subprime crisis: What are the implications for South Africa?," MPRA Paper 70645, University Library of Munich, Germany.
    10. Elissa Braunstein & James Heintz, 2008. "Gender bias and central bank policy: employment and inflation reduction," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 173-186.
    11. Gerald Epstein & James Heintz, 2006. "Monetary Policy and Financial Sector Reform for Employment Creation and Poverty Reduction in Ghana," Country Study 2, International Policy Centre for Inclusive Growth.
    12. Epstein, Gerald A., 2006. "Central Banks as Agents of Economic Development," WIDER Working Paper Series 054, World Institute for Development Economic Research (UNU-WIDER).
    13. repec:ilo:ilowps:486556 is not listed on IDEAS
    14. Gerald Epstein, 2005. "Central Banks as Agents of Economic Development," Working Papers wp104, Political Economy Research Institute, University of Massachusetts at Amherst.
    15. Ghassan Dibeh, 2014. "The Political Economy of Monetary Policy in Resource-Rich Arab Economies," Working Papers 896, Economic Research Forum, revised Dec 2014.
    16. Elissa Braunstein, 2013. "Central bank policy and gender," Chapters,in: Handbook of Research on Gender and Economic Life, chapter 21, pages 345-358 Edward Elgar Publishing.
    17. Muqtada, Muhammed., 2010. "The crisis of orthodox macroeconomic policy : the case for a renewed commitment to full employment," ILO Working Papers 994562813402676, International Labour Organization.

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