New Consensus Macroeconomics Research Articles

Considerations on the Legacy of Ordoliberalism in European Monetary Policy

The paper aims to analysis the ordoliberal legacy in European Monetary Policy between 1998 and 2020. What emerges is that although ordoliberal principles were incorporated into the guiding values of the European treaties, they did not play a key role in guiding either the monetary policy strategies fixed in 1998 and 2003 or the ECB interventions implemented between 2011 and 2020 in response to the Great Recession and the sovereign debt crisis. This is basically due to a) the ECB's acceptance of the New Consensus Macroeconomics (NCM) that recognises the endogenous nature of money and its partial non-neutrality, b) the ECB's constant tendency to act discretionally in order to reach different goals.

Inflation, Monetary Policy and Monetary Aggregates

Taxonomically speaking, the received theories of the macroeconomy may be said to comprise monetarism, structuralism, Marxism, the post-Keynesian view and the New Consensus Macroeconomics (NCM). However, in the last few decades, the mainstream view has been converging on the NCM, representing a grafting of essentially Keynesian ideas on a framework of rational expectations. Associated with this consensus has been a steady de-emphasis on the role of monetary aggregates in the framing of monetary policy. This paper is devoted to an examination of the role of monetary aggregates in each of the macroeconomic theories listed above. In particular, it contests the prevailing mainstream policy viewpoint (heavily influenced by the NCM) that monetary aggregates have no explanatory power for inflation beyond that contained in the output gap. On the contrary, the empirical fact that several monetary shocks originate on the supply side, coupled with the strong possibility of monetary shocks affecting output through relative price changes, make out a strong case for the inclusion of monetary aggregates at least as a Second Pillar of monetary policy (in the manner currently done at the European Central Bank). A monetary policy calibrated without reference to monetary aggregates is like Hamlet without the Prince of Denmark.

The Eurozone in Crisis — A Kaleckian Macroeconomic Regime and Policy Perspective

ABSTRACT The current Covid-19 Crisis 2020 has hit the Eurozone in a highly fragile situation, with a weak and asymmetric recovery from the Great Financial Crisis, the Great Recession and the following Eurozone Crisis. These crises have revealed the weaknesses of the macroeconomic policy institutions and strategies of the Eurozone based on New Consensus Macroeconomics (NCM). Applying a Kaleckian/post-Keynesian analysis of the demand and growth regimes to the EA-12 countries, we show that the internal imbalances within the EA-12 before the Eurozone have been externalised since then. Most of the countries and the EA-12 as a whole have now turned export-led mercantilist and thus highly vulnerable to fluctuations in world demand. For an economic policy alternative we turn towards Kalecki’s macroeconomic policy proposals for achieving and maintaining full employment in a capitalist economy by government deficit expenditures, in combination with re-distribution policies in favour of labour and low-income households, assisted by central banks targeting low interest rates. This approach is then applied to the Eurozone, in order to derive a policy mix which should contribute to a more rapid recovery from the Covid-19 Crisis and to a medium- to long-run non-inflationary full employment domestic demand-led regime.

Critique of the New Consensus Macroeconomics and Implications for India

After travelling a long way, different schools of economic thought rerached a new consensus on macroeconomics during last two decades of the twentieth century. Before the global financial crisis (GFC), many advanced and developing economies were pusrsuing public policies based on the new consensus macroeconomics (NCM). Its major policy recommendations include: (a) inflation targeting, (b) setting of policy rate based on Taylor rule, (c) non-intervention in the asset market (popularly known as Jackson Hole consensus), (d) light-touch regulation of the non-bank sagment, and e) ability of financial markets to regulate themselves (market discipline).

Lessons from the 20 years of the Brazilian inflation targeting regime

This paper analyzes the Brazilian experience with the inflation targeting regime (ITR) since its adoption in June 1999. The theoretical analysis starts by covering the New Consensus Macroeconomics (NCM) only policy, in which the ITR is the monetary policy recommendation. This discussion is then complemented first by the current debate in the international mainstream on the need for a flexible ITR that considers the effects of monetary policy on the economy and second by the heterodox discussion on the need to completely abandon the ITR. The discussion on the Brazilian experience and its comparison with international experiences show that Brazil is one of the few countries where the monetary policy objective is restricted to price control and where the horizon for returning inflation to the target is only one year. Within this institutional framework, the Brazilian economy under the ITR is marked by the maintenance of extremely high real and nominal interest rates and with difficulties in meeting the inflation targets. The price control obtained also did not generate the expected externalities in terms of economic growth and employment. After almost 20 years of adopting the ITR in Brazil, it has generated exaggerated contractionary pressures on the Brazilian economy, indicating the need for a thorough examination of monetary institutions in Brazil in order to resume economic growth with price stability and social equity.

Does fiscal policy affect the monetary transmission mechanism? A monetary theory of production (MTP) response to the new consensus macroeconomics (NCM) perspective

AbstractDrawing on the contributions of Augusto Graziani to the so‐called monetary theory of production, this article aims to show that an accommodative monetary policy—as defended in the new consensus macroeconomics theory and supported by current practice around the world—has the maximum effect in stimulating aggregate demand and income when it is implemented in conjunction with a coordinated discretionary fiscal policy that boosts the demand for and the supply of loans via the reduction of the liquidity risk and the insolvency risk. As a result, the potentially beneficial effects of the traditional Keynesian fiscal multiplier are significantly amplified.

Dynamic stochastic general equilibrium (DSGE) modelling in practice: identification, estimation and evaluation

ABSTRACTIn recent years, dynamic stochastic general equilibrium (DSGE) models have come to play an increasing role in central banks, as an aid in the formulation of monetary policy (and increasingly after the global crisis, for maintaining financial stability). DSGE models, compared to other widely prevalent econometric models (such as vector autoregressive or large-scale econometric models), are less a-theoretic and with secure micro-foundations based on the optimizing behaviour of rational economic agents. Additionally, the models in spite of being strongly tied to theory, can be ‘taken to the data’ in a meaningful way. A major feature of these models is that their theoretical underpinnings lie in what has now come to be called as the New Consensus Macroeconomics (NCM). This paper concentrates on the econometric structure underpinning such models. Identification, estimation and evaluation issues are discussed at length with a special emphasis on the role of Bayesian maximum likelihood methods.

A atual e futura política monetária do Banco Central Europeu

<p>This contribution examines the operations of the European Central Bank (ECB) with respect to monetary policy, along with its effects on inflation, exchange rate and financial stability. It also discusses how the regulatory role of the ECB should be improved in the future. The contribution discusses the involvement of the ECB in regulatory policy towards the financial sector, and the responses of the ECB to the financial crisis. It begins with the current set up of the European Monetary Union (EMU) along with the theoretical principles of the EMU model, and the extent to which it conforms with the theoretical framework of the New Consensus Macroeconomics (NCM) and its policy implications, namely inflation targeting. Problems with the current EMU arrangements are then discussed, followed by required ECB changes, before we finally summarize and conclude.</p>

Análise da política monetária nacional sob a perspectiva do Novo Consenso Macroeconômico

The article aims to synthesize ideas of different authors belonging to the so-called New Consensus Macroeconomics (NCM) and elaborate the formal structure that can demonstrate the real consensus of these ideas. This study also intents to analyze the national monetary policy in the light of the NCM school precepts. The paper presents a brief summary of the main works belonging to the formal field of NCM and a formal structure of the NCM. The formal NCM models, in the context of the closed economy, include three basic equations: an IS curve, a Phillips curve and a Rule o fMonetary Policy Conduction (Reaction Function of the Central Bank). The reaction function of the Central Bank was used to verify the appropriateness of Brazil’s monetary policy to the NCM ideas. In order to do that, econometric instruments were used and statistic data of the Brazilian economy (from July 2001 to December 2009) was analzysed. The main results demonstrate that the national monetary policy conduction appeared to fit partially into the basic precepts of the New Consensus Macroeconomics.Keywords: New Macroeconomic Consensus, monetarypolicy, response function of the Central Bank.GEL Classification: E50; E52.

Credit, money and macroeconomic policy: a post-Keynesian approach

Contents: Introduction Claude Gnos and Louis-Philippe Rochon PART I: ENDOGENOUS MONEY AND FINANCIAL CRISIS 1. A Minsky Moment? The Subprime Crisis and the 'New' Capitalism Riccardo Bellofiore and Joseph Halevi 2. Lessons from the 1929 Crash and the 1930s Debt-deflation: What Bernanke and King Learned, and what they could have learned. Robert Dimand 3. The Collapse of Securitization: From Subprimes to Global Credit Crunch Robert Guttmann PART II: MONETARY POLICY AND POLICY RULES 4. From Monetary to Fiscal Policy Rule: A Matter of Adjustment or Choice? Theodre Koutsobinas 5. Money Creation, Employment and Economic Stability: The Monetary Theory of Unemployment and Inflation Alain Parguez 6. Monetary Policy Without Reserve Requirements: Central Bank Money as Means of Final Payment on the Interbank Market Louis-Philippe Rochon and Sergio Rossi 7. Post Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation Louis-Philippe Rochon and Marc Setterfield PART III: MONETARY POLICY UNDER THE BASEL II ACCORD 8. Basel II: A New Regulatory Framework for Global Banking Robert Guttmann 9. The Basel II Influence on the Money Supply Process: A Comparative Analysis between Eurozone and the USA Stelios Karagiannis, Yannis Panagopoulos and Aristotelis Spiliotis 10. Implications of Basel II for National Development Banks Rogerio Sobreira and Patricia Zendron PART IV: INFLATION TARGETING, NEW CONSENSUS MACROECONOMICS AND MACROECONOMIC POLICY 11. Inflation Targeting Drawbacks in the Absence of a 'Natural' Anchor: A Keynesian Appraisal of the FED and ECB Policies Over the Period 1999-2006 Angel Asensio 12. Fiscal Policy in the Macroeconomic Policy Mix: A Critique of the New Consensus Model and a Comparison of Macroeconomic Policies in France Eckard Hein and Achim Truger 13. Re-thinking Macroeconomic Policies Malcolm Sawyer 14. Turkish Monetary Policy in a Post-Crises Era: A Further Case of 'New Consensus'? Ulas Sener 15. A Macroeconomic Policy in Cognitive Capitalism Paradigm Andrea Fumagalli and Stefano Lucarelli Index

Special Forum on »Macroeconomic Theory and Macroeconomic Pedagogy«: Macroeconomic Theory and Macroeconomic Pedagogy: A response to some criticisms

First paragraphIt is with great pleasure that we participate in this Special Forum discussion of our Macroeconomic Theory and Macroeconomic Pedagogy (MTMP) (Fontana/Setterfield 2009). Before discussing the comments by Claudio Sardoni and Sebastian Dullien, we would first like to outline the substance of MTMP. The book contains sixteen chapters written by active research scholars with an introduction by ourselves and a foreword by C.E. Walsh. The main purpose of the book is to present contemporary macroeconomic theory – specifically, New Consensus Macroeconomics (NCM) and alternatives to the NCM – to introductory and intermediate undergraduate students. To this end, the chapters portray the most recent developments in macroeconomics in a simple and diagrammatic way. Many of the chapters are intended for direct consumption by students, and are therefore suitable for introduction into the classroom. Others are aimed at our colleagues, with a view to influencing the way instructors think about macroeconomic theory, and hence what they will subsequently seek to teach to their students. In our view the book has two main merits. First, MTMP moves beyond the standard IS-LM model and some of its theoretical limitations, including the hypotheses of a fixed money supply, and exogenous expectations. Secondly, it builds on successful pedagogical features of previous models (such as graphical analysis of policy choices) to promote a better understanding of real world issues, including the recent financial crisis and related recession.

The Return of Keynesian Economics: A Contribution in the Spirit of John Cornwall's Work

This paper assesses the recent interest for Keynesian economics in academia and policy-making circles. It examines the main features of Keynesian economics vis-à-vis neoclassical economics, before presenting the three-equation New Consensus Macroeconomics (NCM) model and its Keynesian roots. Drawing on the work of John Cornwall, the main conclusion of the paper is that the most important criticisms of the model are related to the acceptance of the axiom of independence between aggregate supply and aggregate demand by proponents of the NCM view.

New Consensus Macroeconomics: A Critical Appraisal

This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. There are a few problems with this particular theoretical framework. We focus here on two important aspects closely related to NCM: the absence of banks and monetary aggregates from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework. The analysis is critical of NCM from a Keynesian perspective.

Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics

In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. Given the size of the public sector and the increasing role of fiscal policy in modern economies, this simplifying assumption of the NCM model is difficult to defend. This paper maintains that conventional arguments used to support this controversial assumption - including historical reasons, theoretical propositions, and practical issues - do not have solid foundations. There is, in fact, nothing inherently monetary in the stabilization policies found in the model. Thus, fiscal policy could play a role at least as important as monetary policy in the NCM model.

New consensus macroeconomics and inflation targeting: Keynesian critique

A number of countries have adopted Inflation Targeting (IT) since the early 1990s in an attempt to reduce inflation to low levels. Since then, IT has been praised by most literature as a superior framework of monetary policy. We suggest that IT is a major policy prescription closely associated with the New Consensus Macroeconomics (NCM). This paper concentrates mainly on the IT aspects of the NCM. We address the theoretical foundations of IT. This is followed by an assessment of its theoretical foundations, where a number of aspects are discussed. We then turn our attention to an assessment of the empirical work on IT, where we distinguish the work that has been done utilising structural macroeconomic models, and work based in single equation techniques. The IT theoretical framework and the available empirical evidence do not appear to support the views of the proponents.

Inflation Targeting: A Critical Appraisal

Since the early 1990s, a number of countries have adopted Inflation Targeting (IT) in an effort to reduce inflation. Most literature has praised IT as a superior framework of monetary policy. We suggest that IT is a major policy prescription closely associated with the New Consensus Macroeconomics (NCM). Focusing mainly on the IT aspects of the NCM, we address and assess the theoretical foundations of IT, and then assess the empirical work on IT, distinguishing between work that utilizes structural macroeconomic models and work based on single-equation techniques. The IT theoretical framework and the available empirical evidence do not appear to support the views of IT proponents.