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

Philip Arestis and Malcolm Sawyer ()

Economics Public Policy Brief Archive from Levy Economics Institute

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.

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