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The New Monetary Policy

Implications and Relevance

Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie

Beginning with an assessment of new thinking in macroeconomics and monetary theory, this book suggests that many countries have adopted the New Consensus Monetary Policy since the early 1990s in an attempt to reduce inflation to low levels. It goes on to illustrate that the explicit control of the money supply, which was fashionable in the 1970s and 1980s in the UK, US, Europe and elsewhere, was abandoned in favour of monetary rules that focus on interest rate manipulation by the central bank. The objective of these rules is to achieve specific, or a range of, inflation targets.
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Chapter 2: New Consensus Monetary Policy: and appraisal

Philip Arestis and Malcolm Sawyer


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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