Implications and Relevance
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
2. New Consensus Monetary Policy: an appraisal Philip Arestis and Malcolm Sawyer 1. INTRODUCTION A number of countries have adopted an approach to monetary policy that is ﬁrmly based on the idea of an independent central bank using the key interest rate as the policy instrument to achieve the objective of an inﬂation target. The intellectual framework underpinning this approach is that of the New Consensus Macroeconomics (NCM). It is widely viewed as ‘best practice’ in monetary policy. Pioneered in New Zealand and Canada in the early 1990s, it has since spread to a number of countries, which have explicitly adopted inﬂation targeting (Sweden and the UK are two good examples). In other cases (most notably the European Central Bank) countries have adopted a policy close to inﬂation targeting, while in the USA it may be described as ‘stealth inﬂation targeting’. This framework has been praised by most literature as a superior framework of monetary policy. We address the theoretical foundations of the NCM, and provide an assessment of its theoretical foundations. The combination of inﬂation targeting and the NCM we refer to as New Consensus Monetary Policy (NCMP). A ﬁnal section summarizes and draws some conclusions. 2. NEW CONSENSUS MACROECONOMICS, MONETARY POLICY AND ITS MAIN FEATURES NCMP is taken to include the following: (i) the setting by government (normally) of a numerical target range for the rate of (price) inﬂation; (ii) the use of monetary policy as the key policy instrument to achieve...
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