Monetary Policy and Central Banking

Monetary Policy and Central Banking

New Directions in Post-Keynesian Theory

Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye

Divided into two parts, this book presents a detailed, multi-faceted analysis of banking and monetary policy. The first part examines the role of central banks within an endogenous money framework. These chapters address post-Keynesian interest rate policy, monetary mercantilism, financial market organization and developing economies. In the second part of the book, the focus switches to the analysis of the financial crisis that began in 2007. The chapters in this section discuss the role of central banks in times of crisis.

Chapter 1: Between the Cup and the Lip: On Post Keynesian Interest Rate Rules and Long-term Interest Rate Management

Angel Asensio

Subjects: economics and finance, financial economics and regulation, money and banking, post-keynesian economics


Angel Asensio* If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip. (Keynes, General Theory) 1 INTRODUCTION Because the crisis-led financial institutions and banks hold huge amounts of bad debts, they lost confidence in one another and economic agents lost confidence in the stability of the financial system as well. Consequently, the banking crisis specter is still hovering, thereby discouraging firms and households from launching long-term productive and financial investments. Although central banks promptly reduced their intervention rate drastically and pumped high-powered money massively, they have not found much success as regards economic activity. The “transmission mechanisms” look to be broken. The literature on monetary rules will be seriously shocken because of the renewed evidence that monetary policy is first concerned with confidence, for confidence is rarely referred to in that literature. This chapter emphasizes how powerful this concept is in explaining the monetary policy transmission, and how, as a matter of consequence, monetary policy should deal with it if the transmission mechanisms are to be recovered. While the discussion will tackle various aspects of the subject, it will not focus specifically on the prudential aspects, to which much attention has been paid. Instead, our questioning will serve two purposes: first, to emphasize some requirements for the effective control over long-term interest rates; and second to deal with monetary policy in the context of the current...

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