Inflation Targeting: A Critical Approach

Abstract

A New Consensus in Macroeconomics (NCM) has emerged over the past couple of decades or so, which has become highly influential in terms of current thinking on the macroeconomy and of economic policy, especially monetary policy. Its main implication for economic policy has been the implementation of inflation targeting (IT). This paper critically raises a number of issues with both the NCM’s theoretical foundations, as well as with the IT framework. On both accounts, we find a number of problems and weaknesses, which emanate from the absence of money and banks, and from the way the equilibrium real rate of interest is utilized in the NCM model. This suggests that a great deal more research is necessary and very different economic policies than what is suggested by the NCM theoretical framework are necessary to tackle the issues raised in this contribution.

JEL classification: E31 ; E50 ; E60 ; G01