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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 3: Central bank behaviour and the stability of macroeconomic equilibrium: a critical examination of the 'New Consensus'

Mark Setterfield


3. Central bank behaviour and the stability of macroeconomic equilibrium: a critical examination of the ‘New Consensus’ Mark Setterfield* 1. INTRODUCTION It has become commonplace to refer to the existence of a ‘New Consensus’ in monetary macroeconomics. According to Taylor (2000, p. 91), variants of this model are already characteristic of most macroeconomic policy research and the policy models of several prominent central banks, including the Federal Reserve and the European Central Bank. Macroeconomics is, of course, no stranger to ‘consensus’, having been dominated for several decades by the Neoclassical Synthesis.1 But the problem with consensus – especially when it is more apparent than real – is that it can serve to narrow and stifle debate, something that can only fetter scientific progress. As Mehrling remarks with respect to the Neoclassical Synthesis: in the beginning, the neoClassical Synthesis was more of a way of talking than a way of thinking, a common language that allowed diverse groups interested in economic issues to converse with one another … [But] as more and more economists came to speak the new language, it became not just a way of talking but a way of thinking. What could not be said in the new language could not be understood, and hence must be nonsense. The price paid for the unification of economics discourse was therefore a certain flattening of that discourse. (Mehrling, 1996, p. 72) This chapter asserts the importance of continued debate in macroeconomics, based on a critical examination and comparative evaluation...

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