Interest rates, income distribution, and monetary policy dominance: Post Keynesians and the "fair rate" of interest

Abstract

In light of the growing interest in "new consensus" models, this paper examines Post Keynesian alternatives to the Taylor rule. It identifies two distinctive approaches to Post Keynesian interest rate policy, which we label the activist and the parking-it rules. The first approach advocates the use of nominal (or real) interest rates as a tool of aggregate demand fine-tuning, whereas the second approach moves away from reaction functions, claiming that monetary policy has become too dominant in economic discourse. It proposes, instead, an interest rate policy whereby the central bank "parks" the interest rate (real or nominal) according to a specific rule. Three possible parking rules are examined—the Smithin rule, the Kansas City rule, and the Pasinetti fair rate rule. The paper then explores the macroeconomic consequences of a genuine Post Keynesian alternative to new consensus monetary policy along the lines of the fair rate rule.

Keywords:

• income distribution
• inflation
• interest rates
• monetary policy
• stabilization policy
• unemployment