Tuesday, January 31, 2012

Louis-Philippe Rochon on What Should Central Banks Do?

I have posted a video below of the Post Keynesian Louis-Philippe Rochon, talking on the various views of central bank and monetary policy within Post Keynesianism. Louis-Philippe Rochon has also been co-editor of some recent Post Keynesian studies (see Rochon and Vernengo 2001; Rochon and Rossi 2003).

There is a legitimate argument here about the extent of the effectiveness of monetary policy and its (negative/positive) effects on real output. Rochon distinguishes between two traditions within Post Keynesian economics:
(1) the activist Post Keynesians (Basil Moore [1988], Giuseppe Fontana, Thomas Palley), who, instead of an inflation target, wish to use activist monetary policy to target output, investment or capacity utilization;

(2) the group Rochon calls the “parking it” Post Keynesians, who contend the fiscal policy is the main tool to target output, employment and investment, while monetary policy comes with disturbing side effects on real variables. The relationship between interest rates and output is complex and not linear: the monetary transmission between interest rates and real economic variables is unreliable and complicated. The interest rate should be parked at a given level and fiscal policy should be employed. They are three further subdivisions within the “parking it” Post Keynesians:
(i) the Smithin rule: the real rate of interest should be very low, close to zero (John Smithin);
(ii) the Kansas city rule: the nominal rate of interest should be zero, possibly negative real rates of interest (Wray, Matthew Forstater, Pavlina Tcherneva).
(iii) the Pasinetti rule/Fair Rate rule: the real rate of interest should be equal to the rate of growth of labour productivity (Pasinetti).
These approaches are derived from the Keynes and Kaldor endogenous money tradition; they reject neoclassical, new consensus inflation targeting.


Moore, B. J. 1988. Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, Cambridge and New York.

Rochon, Louis-Philippe and Matias Vernengo (eds.). 2001. Credit, Interest Rates, and the Open Economy: Essays on Horizontalism, Edward Elgar Pub., Northampton, MA.

Rochon, Louis-Philippe and Sergio Rossi (eds.). 2003. Modern Theories of Money: The Nature and Role of Money in Capitalist Economies, Edward Elgar Pub, Cheltenham.


  1. Did Keynes actually explicitly endorse endogenous money? I thought Nicholas Kaldor himself criticized The General Theory of Employment, Interest, and Money for having an what he called an "exogenous money supply".

    In any case, isn't it a fact that in practice, the money supply is partially endogenous and partially exogenous? I've talked to economists who have a more orthodox view and even they say that the money supply is neither exogenous nor endogenous in practice. It's a mix of both.

    P.S. Lord Keynes, please check your e-mail.

  2. Blue Aurora,

    Keynes used an exogenous money approach in the GT, but reverted to the endogenous money theory in his article “Alternative Theories of the Rate of Interest,” Economic Journal 47 (1937): 241-252

  3. Interesting post. I am unfamiliar with the Pasinetti rule. Do you have a minute to expound on what happens when the interest rate is equal to the growth rate of labor productivity?

  4. Dave,

    "The real interest rate could be set at its fair level, which, according to Pasinetti (1981), is equal to the trend rate of growth
    of labor productivity. With such a fair rate of interest, the earnings of one hour of labor, when they are saved, allow its owner to obtain a purchasing power that is equivalent to that obtained with the earnings of one hour of labor in the future."