A Critical Reconsideration of the Foundations of Monetary Policy in the New Consensus Macroeconomics Framework

Posted: 10 Sep 2008

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Malcolm C. Sawyer

Levy Economics Institute

Date Written: September 2008

Abstract

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.

Keywords: monetary policy, interest rates, new consensus in macroeconomics

JEL Classification: E10, E4, E52

Suggested Citation

Arestis, Philip and Sawyer, Malcolm C., A Critical Reconsideration of the Foundations of Monetary Policy in the New Consensus Macroeconomics Framework (September 2008). Cambridge Journal of Economics, Vol. 32, Issue 5, pp. 761-779, 2008. Available at SSRN: https://ssrn.com/abstract=1265471 or http://dx.doi.org/10.1093/cje/ben004

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Malcolm C. Sawyer

Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States
845-758-7700 (Phone)
845-758-1149 (Fax)

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