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Can Monetary Policy Affect the Real Economy? The Dubious Effectiveness of Interest Rate Policy

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  • Philip Arestis
  • Malcolm Sawyer

Abstract

Central bankers and many economists have abandoned "activist" policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money-monetarism's emphasis inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment-but also takes a dim view of democratic input to the policymaking process. This brief evaluates a premise subscribed to by most central bankers: that monetary policy can be effectively used to control inflation without any permanent sacrifice in the form of reduced income or job opportunities.

Suggested Citation

  • Philip Arestis & Malcolm Sawyer, "undated". "Can Monetary Policy Affect the Real Economy? The Dubious Effectiveness of Interest Rate Policy," Economics Public Policy Brief Archive ppb_71, Levy Economics Institute.
    • Handle: RePEc:lev:levppb:ppb_71
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    1. van Els, Peter J. A. & Morgan, Julian & Locarno, Alberto & Villetelle, Jean-Pierre, 2001. "Monetary policy transmission in the euro area: What do aggregate and national structural models tell us?," Working Paper Series 94, European Central Bank.
    2. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 91, European Central Bank.
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