Bulletin n. 1/2012 | ||
June 2012 | ||
Peter Howitt |
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What have central bankers learned from modern macroeconomic theory? | ||
in Journal of Macroeconomics , volume 34 n.1 , 2012 , 11-22 | ||
In this essay I argue that modern macroeconomic theory has fallen behind the practice of central banking. After briefly summarizing the current state of macro theory, I focus on what strikes me as the two most important developments in monetary policy in the last two decades – inflation targeting and dealing with financial crises. My analysis rejects the claims made by several authors to the effect that the proliferation of inflation-targeting regimes around the globe represents an application of well-established principles of macroeconomic theory. As for how monetary policy can promote financial stability, a subject on which most economists agree modern theory has been of little help, I argue that macroeconomics has lost touch with the fundamental raison d’ętre of central banking. My diagnosis is that macroeconomic theory has become distracted by its preoccupation with states of equilibrium, a preoccupation that inhibits analysis of a market economy’s coordination mechanisms. I conclude with a plea for a more diverse ecology of approaches to macroeconomic theory, one that finds room for agent-based computational economics as well as for more conventional equilibrium theories. | ||