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Monetary Policy and Neoliberalism

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Monetary Policy and Neoliberalism Chapter 13 Monetary Policy and Neoliberalism This essay1 reviews the monetary policy framework associated with neoliberal- ism which, as a general rule, is based on the so-called New Monetary Policy Consensus (nmpc),2 which includes both inflation targeting (IT) and Central Bank independence (cbi). The nmpc became the dominant (‘best practice’) monetary policy paradigm in several advanced, middle-income and, increas- ingly, poor countries, gradually, since the late 1980s.3 The popularity of the nmpc among mainstream economists and policymakers is based on the theoretical strengths of the nmpc (from the point of view of neoclassical economics), and the alleged successes of countries implementing this policy compact. From this point of view, the nmpc is meant to address a key policy problem: how to anchor domestic monetary systems in the age of neoliberalism, with societies fractured by incompatible political and economic demands, where working classes are under continuing attack, and with economies based on inconvertible credit money and with bloated and liberalised financial sys- tems. In this sense, the nmpc helps to underpin neoliberalism. The manner in which it does so, examined below, makes the nmpc the most appropriate monetary policy strategy for the age of neoliberalism.4 In this sense, the nmpc is hegemonic: it incorporates the most refined policy conclusions drawing upon mainstream economic theory; it is attractively packaged, and its pol- icy recommendations draw upon the ‘common sense’ of the neoliberal age; 1 This essay is original; it is based on ‘Monetary Policy in the Neoliberal Transition: A Politi- cal Economy Review of Keynesianism, Monetarism and Inflation Targeting’, in R. Albritton, B. Jessop and R. Westra (eds.), Political Economy and Global Capitalism: The 21st Century, Present and Future, London, Anthem Press, 2007, pp.89–119, and ‘Monetary Policy and Neo- liberalism’, in D. Cahill, M. Cooper and M. Konings (eds.) sage Handbook of Neoliberalism. London: Sage, 2018, pp. 335–346. 2 The term nmpc is suggested by Arestis and Sawyer (2005) and Fontana (2006); for a review, see Chapter 13. 3 An incomplete list includes Australia, Brazil, Canada, Chile, Colombia, Czech Republic, Ghana, Guatemala, Hungary, Iceland, Indonesia, Israel, Mexico, New Zealand, Norway, Peru, Philippines, Poland, Serbia, South Africa, South Korea, Sweden, Thailand, Turkey and the United Kingdom (see Hammond, 2012 and Roger, 2010). Countries following similar strategies include Argentina, Japan, Singapore, Switzerland and the United States plus the Eurozone. 4 ‘[C]entral banks appear to have learned how to maintain inflation at a low level. For many Central Banks, this new era has been characterised by Central Banks adopting implicit or explicit inflation targets’ (Bordo et al. 2003, p.1). © koninklijke brill nv, leiden, ���9 | doi:�0.��63/9789004393�0�_0�5 <UN> 270 Chapter 13 consequently, they are easy to understand and justify. These policies also pro- mote powerful (finance-driven) interests that are presented as expressions of the ‘common good’. The success of this monetary policy paradigm is not simply the outcome of reasoned academic debate and enlightened policymaking. It is, primarily, due to the reorganisation of social relations and the transformation of eco- nomic policies in country after country under neoliberalism. It was only in this context that the mainstream could address important shortcomings of the anti-inflation strategies attempted after the collapse of the Bretton Woods System, that were generally based either on ‘social accords’, or money supply or exchange rate targeting. Despite the achievements of the nmpc in policy practice, this essay shows that the theoretical foundations of IT and cbi are both eclectic (including insights from the monetarist, new classical and new Keynesian schools of thought) and analytically flawed. They cannot represent reality adequately and, consequently, fail to deploy policy instruments consis- tently in order to maintain economic stability, especially in challenging times, when sensible monetary policies are most needed. In difficult times, countries must resort to pragmatic policies outside the nmpc. The essay includes eight sections. After this introduction, the first substan- tive section reviews the development of the mainstream theory and policy practice of inflation control, focusing on IT and cbi. The second describes the analytical underpinnings of the nmpc and the third focuses on its insti- tutional features and modalities of operation in practice. The fourth considers its outcomes, and explains why they are difficult to assess. The fifth focuses on the costs of the nmpc, including high interest rates, conflicts between IT and balance of payments equilibrium, financial instability and the costs of cbi. The sixth examines the implications for the nmpc of the global financial crisis, starting in 2007. The conclusion summarises the main lessons from this essay, and outlines the challenges ahead. 1 Monetary Policy for Mature Neoliberalism In the post-war (Keynesian-social democratic) ‘golden age’ of capitalism, infla- tion was generally assumed to be due to cost pressures, especially rising wages and balance of payments difficulties. Policy recommendations included, then, incomes policies and exchange rate adjustments within the Bretton Woods Sys- tem, to allow persistent differences in rates of productivity growth to be absorbed through the exchange rate rather than through changes in employment. Per- ceptions shifted between the late 1960s and the early 1980s, when inflationary <UN>.
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