A Post-Keynesian Approach
New Directions in Modern Economics series
Edited by Claude Gnos, Louis-Philippe Rochon and Domenica Tropeano
Chapter 14: Inflation Targeting by the ‘Tyrannical Auctioneer’: The Predominance of a Normative Approach in Monetary Policy
Etelberto Ortiz Cruz 1. THE ISSUES How is it possible that the usual recipe for orthodox monetary policy persists, in spite of its extremely feeble theoretical structure? This chapter argues that the reason rests on its normative base, and not on its theoretical structure. This is evident because its main line of policy intervention does not arise from its price, monetary or macro theory, but from its normative view. The chapter presents an alternative framework to analyze the way in which inflation targeting works in a small open economy. The new monetary consensus revolves around a model of ‘inflation targeting’, which is concerned with coordination and the compromise of the Central Bank (CB) to strive for one particular rate of inflation. That orthodox model can be reduced to three equations: the first is a sort of IS curve; the second is a sort of Phillips augmented expectations model; and the third might be something like a Taylor rule.1 Information and compromise presumably create a more transparent framework, reducing discretion through a reference price: i, the rate of interest. Within this framework the presumption is that monetary policy is neutral and the level of activity in the economy is determined by a host of real factors such as technological change, capital accumulation and so on. Inflation is conceived predominantly as a demand phenomenon and to some extent also as a cost impact. The effect of asset inflation and exchange rate overvaluation plays no role in that model. Disturbances can exist only...
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