Chapter 30: Monetary policy
Monetary policy has gone through significant changes in the wake of the banking crisis that began in 2007, reverting to a more traditional form. Before the crisis, mainstream theory and the practice of monetary policy had been identified as converging on a ‘new consensus’, focused on the role of the interest rate in a neutral-money framework, with an independent central bank prioritizing the control of inflation. There were dissenting voices, notably post-Keynesians anticipating the crisis, focusing on the non-neutrality of money and considering a wider range of monetary policy instruments. The crisis itself forced central banks to consider a wider range of policy goals and to employ a wider range of instruments. Nevertheless a difference persists between the mainstream theoretical approach, which sees monetary policy being transmitted through its impact on expectations in asset markets and asset pricing, and the post-Keynesian approach, which focuses on the transmission through real social experience. We explore current issues for monetary policy in terms of goals and instruments, and the relationship between central banks and government. The chapter concludes by outlining unresolved issues for the future.
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