Pushing on a String: Monetary Policy, Growth Models and the Persistence of Low Inflation in Advanced Capitalism

Abstract

In this article we examine the limited effectiveness of major advanced central banks’ expansionary measures – particularly quantitative easing (QE) – in raising inflation from a post-Keynesian growth model perspective that distinguishes the sectoral-allocative effects of these policies from their class-distributive effects. In terms of sectoral-allocative effects, we empirically link the weak recovery of aggregate demand to the lack of rebalancing of the debt-led growth and export-led growth models and highlight the role of QE in reproducing these growth models. In terms of class-distributive effects, we draw attention to the flattening of the Phillips curve in advanced capitalist economies and explain this flattening from a post-Keynesian conflict model of inflation, pointing to the weakening of labour’s bargaining power as well as to the role of central banks’ overly premature withdrawal of monetary stimulus in contributing to that weakening. Finally, our analysis points to the entrenchment of a self-defeating macroeconomic policy mix (consisting of combination of loose monetary policy and restrictive fiscal policy) in debt-led and export-led growth models, which will continue to thwart efforts of central banks to significantly raise inflation.

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