Abstract
In recent years, a new consensus in macroeconomics, both at the levels of academic research and policy formulation, has emerged: ‘New Consensus in Macroeconomics (NCM)’, also known as ‘New Keynesian Consensus’ or ‘New Neoclassical Synthesis’. This framework is essentially similar to the original ‘Neoclassical Synthesis’, but the NCM models replace the LM-curve of the Neoclassical Synthesis with a Central Bank ‘interest rate reaction function’ often termed the ‘Taylor Rule’. This ‘interest rate reaction function’ targets either a particular level of inflation or a particular level of employment (or output or capacity utilization) or both. This chapter examines the effectiveness of a monetary policy rule that targets only the degree of capacity utilization. It looks at growth cycles around the steady state in a simple macro-dynamic model of interaction between investment function and a central bank ‘interest rate reaction function’ targeting the degree of capacity utilization.
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