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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 6: On the US post-'new economy' bubble: should asset prices be controlled?

Philip Arestis and Elias Karakitsos


6. On the US post-‘new economy’ bubble: should asset prices be controlled? Philip Arestis and Elias Karakitsos 1. INTRODUCTION1 On 26 November 2001 the National Bureau of Economic Research declared that the US economy’s recession had begun in March 2001. The expansion had lasted for ten years and it was one of the longest ever recorded by any industrialized country. In the fourth quarter of 1999 the US growth rate reached 7 per cent, the highest in the 1990s. Unemployment fell to a 30-year low (3.9 per cent by April 2000), the rate of inflation was low (it averaged 2.5 per cent throughout the whole of the 1990s), faster growth in productivity was recorded, and faster growth in real wages. All these factors helped to reduce poverty and stabilize wage inequality (Temple, 2002). More recent data (see Council of Economic Advisers, 2004, Table A33), though, reveal that this is true only for the years 1998–2001. The stock market also produced massive gains, so that by the late 1990s the price/earnings ratios reached record levels for the whole of the twentieth century. Every year between 1995 and 1999 the US stock exchange Standard and Poor’s Composite Index (S&P 500) produced an annualized total return (including dividends) over 20 per cent. By the end of that period, the performance of the stock market was concentrated in the stocks of large companies and of growth companies (those that had been delivering strong growth in earnings per share and were...

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