IDEAS home Printed from https://ideas.repec.org/a/oup/cambje/v37y2013i1p17-33.html
   My bibliography  Save this article

'Solvency rule' versus 'Taylor rule': an alternative interpretation of the relation between monetary policy and the economic crisis

Author

Listed:
  • Emiliano Brancaccio
  • Giuseppe Fontana

Abstract

One of the more debated interpretations of the economic crisis that started in 2007–08 is based on the 'Taylor rule' equation, namely the idea that over the period 2002–05 the Fed has implemented a low-interest policy that has led to the housing bubble and finally to the 'Great Recession'. This paper shows that the Taylor rule equation not only rests on the so-called 'new consensus macroeconomics', but also on the neoclassical theory of growth. The various criticisms raised against these theoretical foundations suggest that interpretations of the Great Recession based on the Taylor rule equation are building their arguments on shaky theoretical premises. Furthermore, this paper shows that an equation formally similar but logically alternative to the Taylor rule can be regarded as the expression of a general condition of solvency of firms and workers. According to this 'solvency rule' the prevailing outcome of monetary policy decisions is the 'regulation' of insolvencies. Copyright , Oxford University Press.

Suggested Citation

  • Emiliano Brancaccio & Giuseppe Fontana, 2013. "'Solvency rule' versus 'Taylor rule': an alternative interpretation of the relation between monetary policy and the economic crisis," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(1), pages 17-33.
    • Handle: RePEc:oup:cambje:v:37:y:2013:i:1:p:17-33
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/cje/bes028
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Jean-Paul Fitoussi & Francesco Saraceno, 2010. "Inequality and macroeconomic performance," Working Papers hal-01069429, HAL.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    4. G. C. Harcourt, 2008. "The Structure of Post-Keynesian Economics," Palgrave Macmillan Books, in: Mathew Forstater & L. Randall Wray (ed.), Keynes for the Twenty-First Century, chapter 0, pages 185-197, Palgrave Macmillan.
    5. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    6. Peter Kriesler & Marc Lavoie, 2007. "The New Consensus on Monetary Policy and its Post-Keynesian Critique," Review of Political Economy, Taylor & Francis Journals, vol. 19(3), pages 387-404.
    7. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    8. Goodhart, C. A. E., 2010. "The Changing Role of Central Banks," Working Papers 11-27, University of Pennsylvania, Wharton School, Weiss Center.
    9. Luigi L. Pasinetti, 2000. "Critique of the neoclassical theory of growth and distribution," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 53(215), pages 383-431.
    10. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h469j4ua7 is not listed on IDEAS
    11. Jean-Paul Fitoussi & Joseph Stiglitz, 2009. "THE SHADOW GN*: The Ways Out of the Crisis and the Builbing of a More Cohesive World," Working Papers hal-01066209, HAL.
    12. Mark Setterfield (ed.), 2002. "The Economics of Demand-Led Growth," Books, Edward Elgar Publishing, number 1864.
    13. Mark Setterfield (ed.), 2010. "Handbook of Alternative Theories of Economic Growth," Books, Edward Elgar Publishing, number 12814.
    14. Peter Docherty, 2009. "Re‐Examining The Implications Of The New Consensus: Endogenous Money And Taylor Rules In A Simple Neoclassical Macro Model," Metroeconomica, Wiley Blackwell, vol. 60(3), pages 495-524, July.
    15. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    16. Fabio Petri, 2004. "General Equilibrium, Capital and Macroeconomics," Books, Edward Elgar Publishing, number 3438.
    17. Tony Aspromourgos, 2004. "Sraffian research programmes and unorthodox economics," Review of Political Economy, Taylor & Francis Journals, vol. 16(2), pages 179-206.
    18. Jamie Morgan, 2009. "The limits of central bank policy: economic crisis and the challenge of effective solutions," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(4), pages 581-608, July.
    19. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    20. Philip Arestis & Malcolm Sawyer, 2008. "Are the European Central Bank and Bank of England Macroeconomic Models Consistent with the New Consensus in Macroeconomics?," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 11(2), pages 51-68, Winter.
    21. repec:hal:wpspec:info:hdl:2441/46mbanhapncmp6s9g2choh4pj is not listed on IDEAS
    22. Philip Arestis, 2009. "The New Consensus in Macroeconomics: A Critical Appraisal," Palgrave Macmillan Books, in: Giuseppe Fontana & Mark Setterfield (ed.), Macroeconomic Theory and Macroeconomic Pedagogy, chapter 5, pages 100-117, Palgrave Macmillan.
    23. George Argitis, 2008. "Inflation targeting and Keynes's political economy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 31(2), pages 249-270, December.
    24. repec:hal:spmain:info:hdl:2441/46mbanhapncmp6s9g2choh4pj is not listed on IDEAS
    25. Jane K. Dokko & Brian M. Doyle & Skander J. van den Heuvel & Michael T. Kiley & Jinill Kim & Shane M. Sherlund & Jae W. Sim, 2009. "Monetary policy and the housing bubble," Finance and Economics Discussion Series 2009-49, Board of Governors of the Federal Reserve System (U.S.).
    26. Aldo Barba & Massimo Pivetti, 2009. "Rising household debt: Its causes and macroeconomic implications--a long-period analysis," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(1), pages 113-137, January.
    27. L. Wray, 2007. "A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 119-141.
    28. Graziani,Augusto, 2003. "The Monetary Theory of Production," Cambridge Books, Cambridge University Press, number 9780521812115, January.
    29. Brancaccio, Emiliano, 2008. "Solvency and Labour Effort in a Monetary Theory of Production," European Journal of Economic and Social Systems, Lavoisier, vol. 21(2), pages 195-211.
    30. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    31. repec:hal:wpspec:info:hdl:2441/5l6uh8ogmqildh09h469j4ua7 is not listed on IDEAS
    32. H. Atesoglu, 2008. "Monetary policy rules and U.S. monetary policy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(3), pages 403-408.
    33. Luigi L. Pasinetti, 2000. "Critique of the neoclassical theory of growth and distribution," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 53(215), pages 383-431.
    34. Hahn, Frank, 1982. "The Neo-Ricardians," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 6(4), pages 353-374, December.
    35. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, June.
    36. Giuseppe Fontana & Mark Setterfield (ed.), 2009. "Macroeconomic Theory and Macroeconomic Pedagogy," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-29166-9.
    37. Gilberto Tadeu Lima & Mark Setterfield, 2011. "The Cost Channel of Monetary Policy in a Post Keynesian Macrodynamic Model of Inflation and Output Targeting," Working Papers 1102, Trinity College, Department of Economics.
    38. Emiliano Brancaccio, 2010. "On the Impossibility of Reducing the Surplus Approach to a Neoclassical 'Special Case': A Criticism of Hahn in a Solowian Context," Review of Political Economy, Taylor & Francis Journals, vol. 22(3), pages 405-418.
    39. Giuseppe Fontana, 2008. "Structural Models and Monetary Policy at the Federal Reserve Board: Last Vestiges of the Neoclassical Synthesis or Pragmatic New Consensus?," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 11(2), pages 69-88, Winter.
    40. Glenn D. Rudebusch, 2009. "The Fed's monetary policy response to the current crisis," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may22.
    41. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    42. J. E. King, 2002. "A History of Post Keynesian Economics since 1936," Books, Edward Elgar Publishing, number 2135.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brancaccio, Emiliano & Giammetti, Raffaele & Lopreite, Milena & Puliga, Michelangelo, 2019. "Monetary policy, crisis and capital centralization in corporate ownership and control networks: A B-Var analysis," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 55-66.
    2. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    3. Fontana, Giuseppe & Sawyer, Malcolm, 2016. "Towards post-Keynesian ecological macroeconomics," Ecological Economics, Elsevier, vol. 121(C), pages 186-195.
    4. Guizhou Wang & Kjell Hausken, 2023. "Modeling which Factors Impact Interest Rates," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 12(2), pages 211-237.
    5. Brancaccio, Emiliano & Califano, Andrea & Lopreite, Milena & Moneta, Alessio, 2020. "Nonperforming loans and competing rules of monetary policy: A statistical identification approach," Structural Change and Economic Dynamics, Elsevier, vol. 53(C), pages 127-136.
    6. Levrero, Enrico Sergio, 2022. "The Taylor Rule and its Aftermath: Elements for an Interpretation along Classical-Keynesian lines," Centro Sraffa Working Papers CSWP59, Centro di Ricerche e Documentazione "Piero Sraffa".
    7. Emiliano Brancaccio & Raffaele Giammetti & Milena Lopreite & Michelangelo Puliga, 2023. "Convergence in solvency and capital centralization: A B‐VAR analysis for high‐income and euro area countries," Metroeconomica, Wiley Blackwell, vol. 74(1), pages 40-73, February.
    8. Emiliano Brancaccio & Domenico Suppa, 2018. "The “Solvency Rule†of the Central Banker in a Monetary Scheme of Reproduction," Bulletin of Political Economy, Bulletin of Political Economy, vol. 12(1-2), pages 77-98, June.
    9. Guizhou Wang & Kjell Hausken, 2022. "Interest Rates, the Taylor Rule, the Quantity Equation, and the Phillips Curve," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 10(3), pages 83-93.
    10. Brancaccio, Emiliano & Giammetti, Raffaele & Lopreite, Milena & Puliga, Michelangelo, 2018. "Centralization of capital and financial crisis: A global network analysis of corporate control," Structural Change and Economic Dynamics, Elsevier, vol. 45(C), pages 94-104.
    11. Emiliano Brancaccio, Orsola Costantini, Stefano Lucarelli, 2015. "Crisi e centralizzazione del capitale finanziario (Crysis and Centralization of Financial Capital)," Moneta e Credito, Economia civile, vol. 68(269), pages 53-79.
    12. Emiliano Brancaccio, 2023. "Centralizzazione del capitale, guerra e pace (Centralization of capital, war and peace)," Moneta e Credito, Economia civile, vol. 76(304), pages 339-356.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.
    2. Kuikeu, Oscar, 2011. "Arguments contre la zone franc [Against the cfa franc zone]," MPRA Paper 33710, University Library of Munich, Germany.
    3. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    4. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
    5. Laura Coroneo & Valentina Corradi & Paulo Santos Monteiro, 2018. "Testing for optimal monetary policy via moment inequalities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(6), pages 780-796, September.
    6. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    7. Jordi Galí & J. David López-Salido, 2003. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," Working Papers 104, Barcelona School of Economics.
    8. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle, and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1557-1584, December.
    9. Andreas Schabert, 2005. "Money Supply and the Implementation of Interest Rate Targets," Tinbergen Institute Discussion Papers 05-059/2, Tinbergen Institute.
    10. Florin O. Bilbiie & Roland Straub, 2013. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 377-392, May.
    11. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    12. Enrico Sergio Levrero, 2021. "Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment," International Journal of Political Economy, Taylor & Francis Journals, vol. 50(1), pages 5-27, February.
    13. Annicchiarico, Barbara & Giammarioli, Nicola & Piergallini, Alessandro, 2012. "Budgetary policies in a DSGE model with finite horizons," Research in Economics, Elsevier, vol. 66(2), pages 111-130.
    14. James Bullard & Kaushik Mitra, 2007. "Determinacy, Learnability, and Monetary Policy Inertia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1177-1212, August.
    15. van der Ploeg, Frederick, 2004. "Prudent Monetary Policy: Applications of Cautious LQG Control and Prediction," CEPR Discussion Papers 4222, C.E.P.R. Discussion Papers.
    16. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
    17. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
    18. Andreas Schabert, "undated". "On the Equivalence of Money Growth and Interest Rate Policy," Working Papers 2003_6, Business School - Economics, University of Glasgow, revised Apr 2003.
    19. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    20. Robert Tchaidze & Alina Carare, 2004. "The Use and Abuse of Taylor Rules: How precisely can we estimate them?," Econometric Society 2004 Latin American Meetings 132, Econometric Society.
    21. Jagjit S. Chadha & Lucio Sarno & Giorgio Valente, 2004. "Monetary Policy Rules, Asset Prices, and Exchange Rates," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 529-552, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:cambje:v:37:y:2013:i:1:p:17-33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/cje .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.