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Credit, Money and Macroeconomic Policy

Credit, Money and Macroeconomic Policy

A Post-Keynesian Approach

New Directions in Modern Economics series

Edited by Claude Gnos and Louis-Philippe Rochon

With recent turmoil in financial markets around the world, this unique and up-to-date book addresses a number of challenging issues regarding monetary policy, financial markets and macroeconomic policy.

Chapter 7: Post-Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation

Louis-Philippe Rochon and Marc Setterfield

Subjects: economics and finance, post-keynesian economics


Louis-Philippe Rochon and Mark Setterfield* INTRODUCTION New consensus macroeconomics has come under considerable criticism from post-Keynesians. One of the more severe criticisms has to do with the quasi-disappearance of fiscal policy as a credible policy tool. Indeed, as Arestis and Sawyer (2003, p. 3) explain, ‘There has been a major shift within macroeconomic policy over the past two decades or so in terms of the relative importance given to monetary policy and to fiscal policy, with monetary policy gaining considerably in importance and fiscal policy being so downgraded that it is rarely mentioned.’ Post-Keynesians have sought to develop alternatives to the new consensus by either amending the basic framework or proposing clear alternatives that focus on downgrading monetary policy and relying more on the use of Keynesian fiscal policy management. One area of research that has recently emerged centres on the role of the rate of interest. This research is the result of the post-Keynesian critique of new consensus models and their reliance, as found in Taylor rules, on the Wicksellian rate of interest. In a recent symposium in the Journal of Post Keynesian Economics, we argued (see Rochon and Setterfield, 2007) that there are two approaches to monetary policy emerging in post-Keynesian theory, what we label respectively the ‘activist’ and the ‘parking-it’ approaches. We defined the former as post-Keynesians who, while advocating the use of fiscal policy, also believe in the ability of central banks to fine-tune economic outcomes (output and unemployment, and perhaps even inflation) and regulate business...

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