A Post-Keynesian Approach
Edited by Claude Gnos and Louis-Philippe Rochon
Chapter 11: Inflation Targeting Drawbacks in the Absence of a ‘Natural’ Anchor: A Keynesian Appraisal of the Fed and ECB Policies from 1999 to 2006
Angel Asensio INTRODUCTION This chapter focuses on the effectiveness of the US Federal Reserve (Fed) and European Central Bank (ECB) monetary policies over the 1999–2006 period. As Fontana (2006) stated, the Fed’s ‘dual mandate’ allows for more flexible monetary policy than the single mandate of the ECB. This is an important topic of the characterization of both monetary policies over the short run. However, the dual mandate vanishes when the long-run monetary policy objectives are considered, at least in the official discourse. In the long run, the official primary objective of both central banks merely amounts to ensuring price stability, as recommended by the ‘new consensus’ principles of governance (see Rochon, 2006). In practice, however, the policies are somewhat distant from the theory, especially in the case of the Fed (Galbraith, 2006). Yet, while the European Union follows the new-economics recommendations on prices and public deficits control more accurately, the Fed’s policy seems to be more effective. Various authors have suggested Alan Greenspan’s pragmatism or the ECB’s dogmatism as the main cause of the Fed’s relative success,1 but the reasons why pragmatism ought to do better than a wholehearted application of the mainstream theoretical recommendations remain unexplored. The chapter explores those reasons by considering the advantage of pragmatism in the face of Keynesian uncertainty. The argument is basically that the new consensus macroeconomic policies entail pernicious effects when they are implemented in a system which does not tend spontaneously towards any ‘natural’ position. We shall put forward three...
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