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A real interest rate rule for monetary policy?

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  • John Smithin

Abstract

This paper examines four alternative types of guidelines for monetary policy: (1) stabilizing the real policy rate of interest at a "low" level, (2) pegging the nominal policy rate, (3) employing a standard monetary policy reaction function to target inflation, and (4) invoking the notion of a "fair" rate of interest. The case defended here is that the first of these alternatives, an attempt to stabilize the real policy rate at some "low" level, is the best option for monetary policy. It is also the most consistent with the traditional Keynesian advocacy of cheap money—"we intend to retain control of our domestic rate of interest, and keep it as low as suits our own purposes."

Suggested Citation

  • John Smithin, 2007. "A real interest rate rule for monetary policy?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 101-118.
    • Handle: RePEc:mes:postke:v:30:y:2007:i:1:p:101-118
    DOI: 10.2753/PKE0160-3477300105
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    Cited by:

    1. Fernando Ferrari Filho, Marcelo Milan, 2018. "Excess Real Interest Rates and the Inflation Targeting Regime in Brazil: Monetary Policy Ineffectiveness and Rentiers¡¯ Interests," Applied Economics and Finance, Redfame publishing, vol. 5(6), pages 84-100, November.
    2. Theodore T. Koutsobinas, 2011. "From Monetary to Fiscal Policy Rule: A Matter of Adjustment or Choice?," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 4, Edward Elgar Publishing.
    3. 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.
    4. Angel Asensio, 2009. "Between the cup and the lip," Working Papers halshs-00496911, HAL.
    5. Giorgos Argitis, 2011. "A view on post-Keynesian interest rate policy," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 8(1), pages 91-112.
    6. Massimo Pivetti, 2019. "On Interest as a Monetary Phenomenon and the ‘Best’ Interest-rate Policy," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(2), pages 167-187, December.
    7. 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.
    8. Soon Ryoo & Peter Skott, 2017. "Fiscal and Monetary Policy Rules in an Unstable Economy," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 500-548, July.
    9. Mevlut Tatliyer, 2017. "Inflation targeting and the need for a new central banking framework," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 40(4), pages 512-539, October.
    10. Angel Asensio & Sébastien Charles & Edwin Le Héron & Dany Lang, 2011. "Recent developments in Post-Keynesian modeling [Los desarrollos recientes de la macroeconomía post-keynesiana]," Post-Print halshs-00664867, HAL.
    11. Pedro Leao, 2015. "Is a Very High Public Debt a Problem?," Economics Working Paper Archive wp_843, Levy Economics Institute.
    12. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.
    13. Eric Kam & John Smithin, 2012. "Capitalism in One Country? A Re-examination of Mercantilist Systems from the Financial Point of View," Chapters, in: Louis-Philippe Rochon & Salewa ‘Yinka Olawoye (ed.), Monetary Policy and Central Banking, chapter 3, Edward Elgar Publishing.
    14. Noemi Levy Orlik, 2012. "The Effect of Interest Rates in Developing Countries: Can Central Bank Monetary Policy Instruments Modify Economic Growth?," Chapters, in: Claude Gnos & Louis-Philippe Rochon & Domenica Tropeano (ed.), Employment, Growth and Development, chapter 12, Edward Elgar Publishing.
    15. Marc Lavoie & Mario Seccareccia, 2019. "Macroeconomics and natural rates: some reflections on Pasinetti’s fair rate of interest," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(2), pages 139-165, December.
    16. Asensio, Angel & Charles, Sébastien & Lang, Dany & Le Heron, Edwin, 2011. "Les développements récents de la macroéconomie post-keynésienne," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 10.
    17. Angel Asensio, 2012. "Between the Cup and the Lip: On Post Keynesian Interest Rate Rules and Long-term Interest Rate Management," Chapters, in: Louis-Philippe Rochon & Salewa ‘Yinka Olawoye (ed.), Monetary Policy and Central Banking, chapter 1, Edward Elgar Publishing.
    18. Greg Hannsgen & Tai Young-Taft, 2015. "Inside Money in a Kaldor-Kalecki-Steindl Fiscal Policy Model: The Unit of Account, Inflation, Leverage, and Financial Fragility," Economics Working Paper Archive wp_839, Levy Economics Institute.
    19. Greg Hannsgen, 2014. "Fiscal Policy, Chartal Money, Mark-up Dynamics and Unemployment Insurance in a Model of Growth and Distribution," Metroeconomica, Wiley Blackwell, vol. 65(3), pages 487-523, July.
    20. Eric Kam & John Smithin & Aqeela Tabassum, 2018. "The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model," Working Papers 074, Ryerson University, Department of Economics.
    21. Peter Docherty, 2021. "A Short Period Sraffa-Keynes Model for the Evaluation of Monetary Policy," Working Paper Series 2021/01, Economics Discipline Group, UTS Business School, University of Technology, Sydney.

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