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CEP discussion paper
Monetary Misconceptions
Willem H. Buiter
August 2000
Paper No' CEPDP0469:
Full Paper (pdf)

Tags: monetary policy; inflation targeting; new paradigm; stabilisation policy

The paper identifies a number of misconceptions about the monetary policy process and the monetary transmission mechanism in the UK. Among the misconceptions about the process are the alleged lack of regional and sectoral representativeness of the Monetary Policy Committee and the view that operational central bank independence means that monetary and fiscal policy are not properly coordinated. Among the transmission mechanism misconceptions, the 'New Paradigm' figures prominently. Among the New Paradigm changes in the British economy that have been given prominence are the following: increasing openness; lower global inflation; lower profit margins, reflecting stronger competitive pressures; buoyant stock markets; a lower natural rate of unemployment; and a higher trend rate of growth of productivity. I argue that the New Paradigm has been over-hyped and misunderstood as regards its implications for monetary policy. Other misconceptions include the 'death of inflation', the 'end of boom and bust', a couple of Neanderthal Keynesian fallacies and the monetary fine tuning fallacy.