Keynes and Macroeconomics After 70 Years
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Keynes and Macroeconomics After 70 Years

Critical Assessments of The General Theory

Edited by L. Randall Wray and Matthew Forstater

In this substantial new collection, esteemed Post-Keynesian scholars reassess the relevance of Keynes’s The General Theory to a broad array of topic areas, ranging from the environment, investment finance, exchange rates, and socialism, as well as inquiries into general Post-Keynesian theory.
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Chapter 11: Inflation Targeting in Brazil: A Keynesian Approach

Luiz Carlos Bresser-Pereira and Cleomar Gomes da Silva


11. Inflation targeting in Brazil: a Keynesian approach Luiz Carlos Bresser-Pereira and Cleomar Gomes da Silva* INTRODUCTION Since the beginning of 1999, when the flotation of the real implied the abandonment of the exchange rate anchor, monetary authorities have adopted inflation targeting (IT) as the new nominal anchor, as if Brazil could not dispense with an anchor. Usually seen as a successful policy in so far as the inflation rate has been kept reasonably under control, IT policy has shown problems related to the achievement of its objectives and, principally, to the high fiscal and development costs involved. These problems are due to two main reasons. On one side, the Taylor rule – the simple model relating the target with the interest rate given the product gap – can only be accepted if it is combined with the consideration of other variables such as exchange rate and employment rate. The argument that the central bank can only have one target because monetary authorities have only one instrument is neither reasonable nor realistic. In practice, central banks do not work in this way. The second one is related to a grave inconsistency dilemma. An IT policy is designed to ‘manage’ monetary policy, not to ‘change’ the ‘monetary policy regime’: it orients the policy maker to define the interest rate within a limited range, not to face an interest/exchange rate trap, characterized by an extremely high interest rate and an overvalued real prevailing in Brazil for many years.1 An IT...

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