A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate

Abstract

This paper addresses three monetary policy issues—policy independence, choice of targets, and rules versus discretion. According to the new monetary consensus, the central bank needs policy independence to build credibility, the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. An alternative view is presented, arguing that an effective central bank cannot be independent as conventionally defined, where effectiveness is indicated by the ability to hit an overnight nominal interest rate target. Discretionary policy and conventional views of central bank ability to achieve traditional goals such as robust growth, low inflation, or high employment are rejected. Thus, the paper returns to Keynes's call for low interest rates and euthanasia of the rentier.

Keywords:

• central bank independence
• Keynes
• monetary policy targets
• Post Keynesian theory
• rules versus discretion