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First @NPEjournal paper out with @MattVermeiren! After GFC, major central banks of the advanced capitalist world have persistently undershot their inflation target. Despite unprecedented monetary expansions. How can we explain this? A Thread: https://www.tandfonline.com/doi/full/10.1080/13563467.2020.1858774
To account for this failure we employ a post-Keynesian growth model perspective and argue that it followed from the failure to rebalance pre-crisis dysfunctional growth models (debt-led vs export-led) towards more sustainable sources of aggregate demand. 2/
We further distinguish the sectoral allocational effects of monetary policy from its class distributional effects on wage inflation. Firstly, on sectoral-allocational effects, we show how different varieties of growth models entail different varieties of transmission channels: 3/
FED’s QE mainly fuelled asset prices, the ECB primarily bolstered export-led growth by depressing nominal exchange rate. QE therefore strengthened pre-crisis growth models (and underlying sectoral and class coalitions) and failed to stimulate aggregate demand sustainably. 4/
Secondly, class-distributional effects: we argue that central banks have contributed to structural weakening of labour – as reflected by the flattening of the Phillips curve – by being overly concerned about the inflationary risks of tight labour markets. 5/
Their strategy of actively pre-empting ‘excessive’ wage inflation has severely undermined the translation of highly expansionary monetary conditions into stronger wage inflation, especially among low-skilled workers. 6/
Thirdly, the macroeconomic policy mix has been highly contradictory and unproductive (combining expansionary monetary policy with restrictive fiscal policy). 7/
However, this was not dysfunctional for everyone: a more prominent role for fiscal policy would have clashed with the interests of the cross-class coalitions underlying the existing debt-led and export-led growth models. 8/
As fiscal expansion during the coronavirus crisis will likely be followed by new rounds of austerity as soon as economic recovery seems on its way, the persistent entrenchment of these coalitions will continue to thwart central banks’ efforts to raise inflation. /END
