Chapter 2: The ‘New Consensus’ in Macroeconomics and Monetary Policy
1 INTRODUCTION Alongside an emphasis on monetary policy, rather than ﬁscal policy, has gone the development of what now may be termed a ‘new consensus’ in macroeconomics and monetary policy. In this chapter we elaborate on the nature of this ‘new consensus’. In Chapter 3 we illustrate it by reference to the macroeconometric model of the Bank of England. In subsequent chapters we will examine the implications of this ‘new consensus’ for both monetary and ﬁscal policy. A possible, and important, policy implication of the ‘new consensus’ mode of thought is ‘inﬂation targeting’ (IT). Over the past decade, a number of countries have adopted IT in attempts to reduce inﬂation to low levels and/or to sustain inﬂation at a low level. IT has been praised by most studies as a superior framework of monetary policy (Bernanke, Laubach, Mishkin and Posen, 1999) and, to quote a recent study, ‘The performance of inﬂation-targeting regimes has been quite good. Inﬂation-targeting countries seem to have signiﬁcantly reduced both the rate of inﬂation and inﬂation expectations beyond that which would likely have occurred in the absence of inﬂation targets’ (Mishkin, 1999, p. 595).1 IT involves the manipulation of the central bank interest rate (the repo rate), with the speciﬁc objective of achieving the goal(s) of monetary policy. The latter is normally the inﬂation rate, although in a number of instances this may include the level of economic activity (the Federal Reserve monetary...
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