New Consensus In Macroeconomics Research Articles

‘Independence’ of Central Banks and the Political Economy of Monetary Policy

ABSTRACT The notion of an ‘independent’ central bank has dominated monetary policy debates for the past three decades. The arguments for the political independence of central banks are closely related to the adoption of ‘inflation targeting’. The arguments for an independent central bank are based on the ‘credibility’ of the ‘conservative’ central bank in comparison to government decision making. The independence of a central bank has been a matter of independence from government but not independence from the grip of the ‘new consensus in macroeconomics’ nor from the interests of the banking and financial sector. That independence has also supported a lack of co-ordination between monetary and fiscal policies, diminishing the effectiveness of macroeconomic policies. In addition, there remain doubts about the effectiveness of ‘inflation targeting’ on the achievement of low inflation. The policy mandates of central banks have begun to shift towards financial stability and paying attention to issues of inequality and the climate emergency.

ВІД СИНТЕЗУ ЕКОНОМІЧНИХ ТЕОРІЙ ДО ПОЛІТИЧНОГО КОНСЕНСУСУ: МОНЕТАРНО-ФІСКАЛЬНІ ДИЛЕМИ МАКРОЕКОНОМІЧНОЇ СТАБІЛІЗАЦІЇ В УМОВАХ КОРОНАКРИЗИ

Базуючись на ревізії змістовних положень неокласичного синтезу і нового макроекономічного консенсусу задля висвітлення особливостей інтерпретації їхніми адептами макроекономічних процесів, природи циклічних коливань і способів їх нівелювання та коригування, проведено аналіз урядових програм макроекономічної стабілізації обраних країн на предмет встановлення їх відповідності науковим підходам, що детермінують політичний вибір на користь застосування монетарних і/або фіскальних інструментів стимулювання економічної активності. Встановлено, що найбільш затребуваними в політичній площині стають висновки нового неокласичного синтезу (Нового макроекономічного консенсусу), який об'єднує новий кейнсіанський підхід і підхід реального ділового циклу, втім і вони коригуються в довільній формі, залежно від пріоритетності завдань, що ставить перед собою уряд (прагнення до досягнення повної зайнятості; стабілізація цін; економічне зростання і рівновага платіжного балансу; ефективне використання обмежених ресурсів), передбачають здебільшого короткостроковий горизонт планування, що ускладнює вихід із «зачарованого кола» економічної політики, коли її динамічний розвиток стає заручником потреби в постійній адаптації поведінки відповідно до мінливих умов, які вона сама своїм коригуванням і зумовлює. Виявлено, що в ситуації коронакризи питання боротьби з одночасними проявами шоків попиту і пропозиції,та зокрема безробіттям, визнаються за пріоритетні й прагнуть бути вирішеними за рахунок поєднання інструментарію монетарної та фіскальної політик, у тому числі й на засадах регуляторної конкуренції, яка реалізуєтьсязасобами неопротекціонізму, що визначається нами як сукупністьпринципів, інструментів і методів регуляторної політики держави у сфері міжнародної торгівлі, міжнародного руху капіталу і зарубіжних інвестицій, а також міжнародних валютно-фінансових і кредитних відносин, імперативом реалізації якої є стимулювання соціально-економічного розвитку та економічного зростання країни шляхом створення умов для підвищення економічної активності всіх суб’єктів господарювання.

The ‘new economics’ and policies for financial stability

The purpose of this paper is to consider the policy implications of the ‘new economics’. The focus will be on financial stability as an objective of policy within a more general framework of policies. The theoretical framework upon which we base our policy conclusions is summarised to provide understandings of the operation of the economy and the need for policy interventions, before the main policy implications, the focus of this paper, are discussed. In doing so we argue that an important policy dimension, which has been ignored in the past, is financial stability, a new focus of monetary policy amongst other implications. The theoretical framework upon which we base our policy conclusions tries to avoid the problems encountered by the previously dominant paradigm ‘New Consensus in Macroeconomics’. It represents in this sense ‘new thinking in economics’.

A new paradigm for macroeconomic policy

In this paper we advocate a way of approaching macroeconomic policy, which stands in contrast to the now discredited 'new consensus in macroeconomics' policy framework. The five pillars of our approach are: the need for budget deficits to support the level of aggregate demand; full consideration of income distribution and its implications for the level of demand; the interest rate policy pursued by the central bank should aim for a constant real rate of interest with that interest rate broadly in line with the rate of growth; the coordination of economic policies with the implication of an end of central bank independence; and the key policy objective of the central bank should be financial stability.

Fiscal policy is still an effective instrument of macroeconomic policy

Recent developments in macroeconomics and macroeconomic policy, what has come to be known as ?New Consensus in Macroeconomics?, downgrades the role of fiscal policy and upgrades that of monetary policy. This contribution aims to consider this particular contention by focusing on fiscal policy. We consider fiscal policy within the current ?new consensus? theoretical framework, which views fiscal policy as ineffective, and argue that it deserves a great deal more attention paid to it than it has been recently. We review and appraise recent and not so recent theoretical and empirical developments on the fiscal policy front. The possibility of fiscal and monetary policy coordination is proposed and discussed to conclude that it deserves a great deal more attention and careful consideration than it has been given to in the past. Our overall conclusion is that discretionary application of fiscal and monetary policy in a coordinated and focused manner as a tool of macroeconomic policy deserves serious attention paid to it than hitherto.

Special Forum on »Macroeconomic Theory and Macroeconomic Pedagogy«: The New Consensus in macroeconomics and non-mainstream approaches

First paragraphGiuseppe Fontana and Mark Setterfield have edited an interesting book on the relationship between recent developments in macroeconomics and the teaching of the discipline at the undergraduate and intermediate levels (Fontana/Setterfield 2009). The editors have chosen to focus the book on the ›New Consensus‹ in macroeconomics, on criticisms of such an approach and alternatives to it. The ›New Consensus‹ is presented in its simplest version as it is presented when teaching macroeconomics at the introductory and intermediate level. The ›New Consensus‹ is characterized by a three-equation model. In this model, the quantity of money is endogenously determined and the ›old Keynesian‹ LM curve is abandoned. The collection of essays presented by Fontana and Setterfield offers a presentation of the ›New Consensus‹ model and critical alternatives to it by scholars engaged both in the mainstream and in the heterodox (mainly post-Keynesian) camps.

Crises and paradigms in macroeconomics

Contrasts are drawn between mainstream macroeconomics (with the ›New Consensus in Macroeconomics‹ taken as the current manifestation) and heterodox macroeconomics and their abilities to comprehend the financial crises and world wide recession of 2007 – 09 for macroeconomic paradigms is discussed. Specifically, the contrasting ways in which the two schools of thought treat unemployment, human behaviour, aggregate demand and money and credit are discussed. It is concluded that the events of 2007 – 09 once again cast doubt on the abilities of mainstream macroeconomics to confront the realities of capitalist economies.

What Monetary Policy after the Crisis?

The objective of this paper is to reflect on some of the implications that recent economic experience has for monetary and financial stability policies. We contend that the financial crisis and the upsurge in inflation 2007–08 have shown that the policy model based on the new consensus in macroeconomics, which largely held sway over the past decade or more, is broken. It is argued that inflation targeting cannot deliver low inflation. We argue that fine-tuning through interest rates should not be attempted, but rather a constant real interest rate target based on the output growth rate should be adopted. The key objective of monetary policy should be shifted to financial stability, the independence of central banks should be brought to an end, and their decision making should be coordinated with other macroeconomic policy initiatives.

A critical reconsideration of the foundations of monetary policy in the new consensus macroeconomics framework

Monetary policy has become firmly based on the use of interest rate as the key policy instrument, and in a one instrument-one target framework. The approach to monetary policy is closely associated with the new consensus in macroeconomics (NCM). This paper undertakes a critical appraisal of the role of monetary policy in the context of the NCM. After setting out the main features of the NCM, there is critical discussion of the role of monetary policy and the NCM framework. The discussion covers the nature of the loss function, the role of the ‘natural rate of interest’ and the Phillips' curve. This is followed by a critical evaluation of the IS curve in the NCM and the classical dichotomy. The paper finishes by asking whether interest rates do have the effects claimed for them.

Monetary policy in the UK

The authors argue that the institutional dimension of the Bank of England monetary policy and the role the UK HM Treasury assumes in this framework are both firmly based on the New Consensus in Macroeconomics (NCM). This is also the theoretical framework upon which the inflation targeting element of monetary policy is firmly based. This paper discusses these aspects of UK monetary policy, and then assesses the policy that has been pursued since 1997 (with some reference made to the period between 1992 and 1997 when a version of the framework was introduced). The strategy has been successful in terms of keeping UK inflation rates within the targets set by HM Treasury. However, a number of problematic issues are highlighted and discussed.