Europe's Quest for Monetary Stability. Central Banking Gone Astray

Bibow, Jörg

doi:10.2753/ijp0891-1916350102

Cited by 21 publications

(12 citation statements)

References 10 publications

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“…On the monetary front the low level and asymmetrical nature of the inflation target set by the ECB creates selfinflicted credibility problems, and imparts an upward bias to interest rates that is widely perceived as a constraint on growth. Bibow (2005) likens it to driving a Ferrari with a foot permanently on the brake. From the perspective of the principle of effective demand it is apparent that the ECB strategy forces up the expected normal rate of interest producing a point of effective demand that inhibits growth in the absence of a buoyant marginal efficiency of capital.…”

Section: Assessment Of Post Keynesian Monetary Economicsmentioning

confidence: 99%

“…As Bibow (2005) also explains, the dual objectives of price stability and high employment required by the Treaty on European Union have been conflated by the ECB into the single objective of price stability. What is more ironic, the ECB has been cut free from public control in the name of central bank independence!…”

Section: Assessment Of Post Keynesian Monetary Economicsmentioning

confidence: 99%

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The principle of effective demand and the state of post-Keynesian monetary economics

Rogers¹

2017

Advances in Endogenous Money Analysis

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Keynesians of all shades have generally misunderstood the theoretical structure of the General Theory. What is missing is an appreciation of the principle of effective demand. As Laidler (1999) has documented, Old Keynesians largely fabricated the theoretical basis of the Keynesian Revolution and retained the 'classical' analysis of longperiod equilibrium. Old Keynesians generally took Frank Knight's (1937) advice to ignore the claim to revolution in economic theory and interpreted the General Theory as another contribution to the theory of business cycles. This is most obvious from the Old Keynesian reliance on wage rigidity to generate involuntary unemployment. But for Keynes (1936, chapter 19), wage and price stickiness is the 'classical' explanation for unemployment to be contrasted with his explanation, in terms of the principle of effective demand, where the flexibility of wages and prices cannot automatically shift longperiod equilibrium to full employment. New Keynesians have continued the 'classical' vision by providing the microeconomic foundations for the 'ad hoc' rigidities employed by Old 1 Keynesians. Generally, New Keynesians do not question the underlying 'classical' vision. Post Keynesians have always questioned the 'classical' vision but have not succeeded as yet in agreeing on what the principle of effective demand is 1. There should, however, be no grounds for misunderstanding of the principle of effective demand given Keynes's exposition in the General Theory and Dillard's (1948) synopsis. As Dillard (1948) explained, the principle of effective demand is the key theoretical innovation of the General Theory. In its most general form the principle of effective demand demonstrates that the rate of interest sets a limit to the profitable expansion of output before full employment is achieved. Keynes also argued in the General Theory that there was no mechanism in a laissez faire monetary economy for automatically generating the natural rate of interest consistent with full employment; as he had believed when writing the Treatise. Consequently, a monetary entrepreneur economy (laissez faire capitalism) is one where the rate of interest would be too high to achieve full employment. This is a structural and not a cyclical problem. 2 Keynes's diagnosis of a laissez faire monetary economy is that it suffers from two related structural flaws. These can be summarized crudely by the statement that the expected or 'normal' rate of interest is too high and the rate of investment is too low. As it is the rate of interest that ultimately determines the point of effective demand and longperiod

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Section: Assessment Of Post Keynesian Monetary Economicsmentioning

confidence: 99%

Section: Assessment Of Post Keynesian Monetary Economicsmentioning

confidence: 99%

The principle of effective demand and the state of post-Keynesian monetary economics

Rogers¹

2017

Advances in Endogenous Money Analysis

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“…Wage policies, however, may not only affect prices, but may also change distribution if firms do not completely pass unit labour cost variations to prices or if prices of other inputs do not change in step 7 The ECB has tended to tighten whenever inflation increased above the target without relaxing when inflation expectations came down. For a general critique of the ECB's 'anti-growth bias' see Bibow (2002Bibow ( , 2005aBibow ( , 2005b and Hein (2002). 8 See Arestis/Sawyer (2005) and Sawyer (2002) for recent post-Keynesian models of distribution conflict and inflation, and Hein (2006aHein ( , 2006b for the integration of real debt effects into Kaleckian models of distribution and growth with conflict inflation.…”

Section: Fiscal Policymentioning

confidence: 99%

Monetary Policy, Macroeconomic Policy Mix and Economic Performance in the Euro Area

Hein¹,

Truger²

2007

Money, Distribution and Economic Policy

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In order to explain slow growth and high unemployment in the Euro area, in particular if compared to the USA, we follow a macroeconomic policy view focussing on the more restrictive stance of monetary, fiscal and wage policies in the Euro area. In the present paper we focus on the particular role of monetary policy, because the European Central Bank (ECB) seems to be the major obstacle to higher growth and employment. Analysing the macroeconomic policy mix, wage policies and fiscal policies are taken into account at the outset, but then the determinants of ECB policies are assessed in more detail. Our analysis confirms that it is the ECB's overemphasising a too low inflation target which is a major problem for macroeconomic performance in the Euro area. The ECB is too exclusively occupied with inflation and wage developments and pays too little attention to the development of real variables. In order to improve growth and employment and to limit the risks of deflation in the largest economy of the Euro area, Germany, it is therefore required that the ECB raises its inflation target and that the central bank focuses more on real economic activity.

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“…5 The ECB has tended to tighten whenever inflation increased above the target without relaxing when inflation expectations came down. For a general critique of the ECB's 'anti-growth bias' see Bibow (2002Bibow ( , 2005aBibow ( , 2005b Hein (2002) and Hein/Truger (2006b Hein (2006aHein ( , 2006b) for the integration of real debt effects into Kaleckian models of distribution and growth with conflict inflation.…”

Section: The Macroeconomic Impact Of Monetary Policy and Wage Developmentioning

confidence: 99%

Fiscal Policy and Macroeconomic Performance in the Euro Area: Lessons for the Future

Hein¹,

Truger²

2007

Euroland and the World Economy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSince the start of the European Monetary Union fiscal policy in the Euro area has been dominated by the Stability and Growth Pact (SGP). Quite obviously the SGP has been unsuccessful in fulfilling its goals, fiscal sustainability and supporting economic growth. More and more countries have exceeded the 3 percent of GDP limit for the budget deficit, while at the same time macroeconomic performance has been unsatisfactory. We analyse fiscal policy and its macroeconomic impact for the Euro area as a whole and for selected countries and compare it with US fiscal policy, with a special emphasis on the period 2001-2005. Whereas US fiscal policy has been strongly counter-cyclical, thus stabilising the economy, in the Euro area fiscal policy has been much more restrictive and has had procyclical and therefore destabilising effects for many countries. However, one cannot put all the blame on fiscal policy. The ECB's restrictive monetary policy and divergent and destabilising wage developments across the Euro area are at least as important as fiscal policy in the explanation of the Euro area's weak economic performance. As a possible solution for the future, we suggest to replace the SGP by expenditure paths as coordination tool, and we discuss an important modification of the concept. Such expenditure paths could co-ordinate fiscal policies across the Euro area in a counter-cyclical way and at the same time ensure fiscal sustainability. Unfortunately, as long as monetary and wage policies remain uncoordinated and destabilising, any improvements in fiscal policy will not be very effective in enhancing economic performance.JEL-Code: E 62, E 63, E 65, E 61.

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Europe's Quest for Monetary Stability. Central Banking Gone Astray

Cited by 21 publications

References 10 publications

The principle of effective demand and the state of post-Keynesian monetary economics

The principle of effective demand and the state of post-Keynesian monetary economics

Monetary Policy, Macroeconomic Policy Mix and Economic Performance in the Euro Area

Fiscal Policy and Macroeconomic Performance in the Euro Area: Lessons for the Future

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