Pushing on a String: Monetary Policy, Growth Models and the Persistence of Low Inflation in Advanced Capitalism

ABSTRACT

In this article we examine the limited effectiveness of major advanced central banks’ expansionary measures – particularly quantitative easing (QE) – in raising inflation from a post-Keynesian growth model perspective that distinguishes the sectoral-allocative effects of these policies from their class-distributive effects. In terms of sectoral-allocative effects, we empirically link the weak recovery of aggregate demand to the lack of rebalancing of the debt-led growth and export-led growth models and highlight the role of QE in reproducing these growth models. In terms of class-distributive effects, we draw attention to the flattening of the Phillips curve in advanced capitalist economies and explain this flattening from a post-Keynesian conflict model of inflation, pointing to the weakening of labour’s bargaining power as well as to the role of central banks’ overly premature withdrawal of monetary stimulus in contributing to that weakening. Finally, our analysis points to the entrenchment of a self-defeating macroeconomic policy mix (consisting of combination of loose monetary policy and restrictive fiscal policy) in debt-led and export-led growth models, which will continue to thwart efforts of central banks to significantly raise inflation.

KEYWORDS:

• Monetary policy
• QE
• growth models
• lowflation
• labour power

Acknowledgements

We would like to thank Benjamin Braun, Dirk De Bièvre and William Kindred Winecoff for commenting on previous versions of this paper. We are also indebted to Bakou Mertens for the compilation of data on share repurchases. Finally, we thank the editors of NPE and two anonymous reviewers for their helpful comments and suggestions. All usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 On the sectoral-allocational effects of fiscal policy, see Haffert and Mertens (2019).

2 At the same time, rising housing prices and the QE-induced decline in mortgage borrowing costs did not improve housing affordability: within the bottom 50 per cent of income earners, the share of (both owning and renting) households paying more than 30 per cent of disposable income on housing costs remained steady at 70 per cent; notably, within the group of owners, that share increased from 57 per cent in 2012 to more than 59 per cent in 2018 according to survey data from the US Census Bureau.

3 There are two interpretations of its self-imposed price stability target: either the ECB dislikes inflation rates above 2 per cent more than rates below 2 per cent or the ECB’s policy responses to past inflation gaps are symmetric around a target significantly below 2 per cent (e.g. 1.6 per cent) (see Paloviita et al. 2017 for a discussion).

4 https://www.vox.com/future-perfect/2019/5/24/18635652/federal-reserve-unemployment-rate-hikes; https://ftalphaville.ft.com/2017/01/19/2182705/debunking-the-nairu-myth/.

5 There are authors who believe central banks do have sufficient ammunition to boost aggregate demand and inflation if they would be willing to adopt more radical instruments like ‘dual interest rates’ (Lonergan and Green 2020) or ‘QE for the people’ (Coppola 2018).

Additional information

Notes on contributors

Hielke Van Doorslaer

Hielke Van Doorslaer is a PhD candidate in International Political Economy (IPE) at the Ghent Institute for International Studies (GIIS), Ghent University (Belgium). His research is centered on the impacts of the Great Financial Crisis on the theoretical and practical underpinnings of central banking.

Mattias Vermeiren

Mattias Vermeiren is Associate Professor of International Political Economy at the Ghent Institute for International Studies (GIIS). His latest book is Crisis and Inequality: The Political Economy of Advanced Capitalism (Polity, 2021).