Re-examining Monetary and Fiscal Policy for the 21st Century
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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 6: The Inflationary Process

Philip Arestis and Malcolm Sawyer

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6. The inflationary process 1 INTRODUCTION It can be readily seen from our previous discussion of the NCM (especially Chapter 2) that the view of inflation within the NCM is one of ‘demand pull’ only. The simple model used in Chapter 2 drew heavily on the reduced form of the Phillips curve in which price inflation was linked to output (relative to trend) and expected inflation, and hence with demand. In this chapter we outline what we see as a more suitable framework for the analysis of the ‘inflationary process’. In our perspective on inflation, demand and changes in demand have a role to play, but there are other important ingredients, notably the role of cost and distributional pressures, imported inflation, the size of productive capacity and endogenous money. These other ingredients are of equal, if not of greater, importance in our understanding of the ‘inflationary process’. Another important ingredient of the NCM approach is the assertion of a supply-side equilibrium level of output (or, equivalently, employment) which is unaffected by the path of the economy. This may be seen by reference to equation (2.2) in Chapter 2, where a zero output gap corresponds to this supply-side equilibrium. This generates the significant conclusion that deflationary policies (whether designed to reduce inflation or used for other purposes) do not have any long-lasting impact on the level (or growth) of output. The nature of the supply-side equilibrium is also of considerable...

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