Alternative Monetary Regimes PDF Download

A Post Keynesian model is developed to examine the main features and consequences of a monetary regime based on inflation targeting. The growth performance of this regime is compared to the one resulting from real exchange rate targets. Inflation targeting is shown to hurt growth and employment performance. Real exchange rate targeting, on the other hand, allows placing the economy on a higher growth path, but the trilemma hurts inflation performance. This problem may be mitigated by adjustments in the legal reserve requirement rate or capital controls. Long-run dynamics is shown to be stable in both regimes, as long as there is enough nominal wage flexibility. The model generates endogenous economic growth. Finally, it is argued that the formalization of the monetary sector provides a bridge between monetarist interpretations of inflation and the Keynesian emphasis on effective demand.