Credit, Money and Macroeconomic Policy
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Credit, Money and Macroeconomic Policy

A Post-Keynesian Approach

Edited by Claude Gnos and Louis-Philippe Rochon

With recent turmoil in financial markets around the world, this unique and up-to-date book addresses a number of challenging issues regarding monetary policy, financial markets and macroeconomic policy.
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Chapter 4: From Monetary to Fiscal Policy Rule: A Matter of Adjustment or Choice?

Theodore T. Koutsobinas


Theodore T. Koutsobinas INTRODUCTION During the last 10 years, economic policy has been dominated by a new analytical framework. The synthesis, which has been called the ‘New consensus’ approach (NCA) has received considerable attention in terms of theoretical and empirical discussion and is considered to be a significant departure for the development of research in the area of monetary policy. The most prominent feature of the NCA is the adoption of Taylor’s policy rule in place of the exercise of discrete policy. A by-product of the emphasis in policy rules is that in this new context, the quantity approach to money and the monetarist warnings on the role of monetary aggregates are abandoned. The discussion on the NCA has been broad across different schools of economic thought, although the focus is often different. For example, while in the new-Keynesian tradition there is an interest in the improvement or potentially in the replacement of the Taylor policy rule, there is an evident concern in the post-Keynesian tradition about the use of fiscal policy as a potent instrument (see Arestis and Sawyer, 2003, 2006; Nell and Forstater, 2003). This framework has been raised in the context of the ‘functional finance’ approach, on the basis of the seminal paper of Lerner (1943), which asserts that the budget position should be utilized to ascertain a high level of economic activity under circumstances in which otherwise a lower level of economic activity prevails. The purpose of this chapter is to assess the potential for the...

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