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Re-examining Monetary and Fiscal Policy for the 21st Century

Philip Arestis and Malcolm Sawyer

This book provides a much-needed re-examination of monetary and fiscal policies, their application in the real world and their potential for macroeconomic policy in the 21st century. It provides a detailed discussion and critique of the ‘new consensus' in macroeconomics along with the monetary and fiscal policies encapsulated within it.
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Chapter 2: The ‘New Consensus’ in Macroeconomics and Monetary Policy

Philip Arestis and Malcolm Sawyer


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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