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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 10: The experience of inflation targeting since 1993

Charles Goodhart


10. The experience of inflation targeting since 1993 Charles Goodhart 1. A SUCCESSFUL AND STABLE OUTCOME Since 1993 the economy has remained on a very stable, and relatively successful, trajectory. The main feature of an inflation-targeting monetary regime is, of course, the achievement of that target. This has been successfully maintained, as shown in Figure 10.1. Meanwhile growth has remained consistent, with no quarter of negative growth since 1993. Moreover, the fluctuations in the growth rate in these last 11 years have been considerably lower than previously, with a marked reduction in the scale of cyclical fluctuations, as shown in Figure 10.2. Meanwhile unemployment has been steadily % 10 9 8 7 6 5 4 3 2 1 0 85 87 89 91 93 Year 95 97 99 01 Figure 10.1 Annual RPIX 164 Inflation targeting since 1993 165 % 3.0 2.5 2.0 1.5 1.0 0.5 0.0 –0.5 –1.0 –1.5 –2.0 85 87 89 91 93 95 Year 97 99 01 Quarterly growth (LHS) Annual growth (RHS) 6% 5 4 3 2 1 0 –1 –2 –3 –4 Figure 10.2 Real GDP growth declining. The only fly in the ointment has been that the rate of growth of productivity per head has not matched the increases recently shown in the USA, and has, indeed, been slightly below the previous, and subsequently expected, average over time. Yet this general economic stability was achieved without having to vary the main instrument of demand management, to wit interest rates, very...

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