New consensus macroeconomics and inflation targeting: Keynesian critique

Abstract

A number of countries have adopted Inflation Targeting (IT) since the early 1990s in an attempt to reduce inflation to low levels. Since then, IT has been praised by most literature as a superior framework of monetary policy. We suggest that IT is a major policy prescription closely associated with the New Consensus Macroeconomics (NCM). This paper concentrates mainly on the IT aspects of the NCM. We address the theoretical foundations of IT. This is followed by an assessment of its theoretical foundations, where a number of aspects are discussed. We then turn our attention to an assessment of the empirical work on IT, where we distinguish the work that has been done utilising structural macroeconomic models, and work based in single equation techniques. The IT theoretical framework and the available empirical evidence do not appear to support the views of the proponents