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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 8: The monetary policy outcomes curve: can the size and structure of public debt undermine policy objectives?

Stephanie Bell-Kelton and Rex Ballinger


Stephanie Bell-Kelton and Rex Ballinger 1. INTRODUCTION After decades (if not centuries) of attention, there remains scant agreement on many fundamental issues regarding monetary policy. Historically, the more hotly contested battles have centered on the issue of ‘rules’ versus ‘discretion’ – especially between monetarists and Keynesians. But aside from the battles over the relative merits of short- versus long-term policy objectives (that is, fine-tuning versus maintaining price stability and fiscal balance), the mainstream has generally agreed that monetary easing will, in the short run, have expansionary effects, while tightening will prove contractionary at the macro level.1 This chapter challenges that common ground, arguing that when the government debt is large, and a significant portion of it is shortterm or interest-variable, monetary easing (tightening) may well have contractionary (expansionary) effects, leading to perverse macro outcomes. Thus our central question is whether raising (lowering) the interest rate is recessionary or expansionary. Our proposition is that it depends crucially upon the size, sectoral distribution and maturity of the government’s outstanding debt. The question of whether the mix of public debt has any impact on the real economy through interest rate channels has recently been debated by an impressive cast of policymakers and academics (Chrystal, 1998). Our chapter addresses the subject matter of these debates, but it does so with reference to the work of Hyman Minsky, whose financial insights were not part of these recent discussions. Specifically, we consider Minsky’s income, balance sheet and portfolio channels. We conclude with an empirical look...

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