A number of countries have adopted Inflation Targeting (IT) since the early 1990s in an attempt to reduce inflation to low levels. Since then, IT has been praised by most literature as a superior framework of monetary policy. We suggest that IT is a major policy prescription closely associated with the New Consensus Macroeconomics (NCM). This paper concentrates mainly on the IT aspects of the NCM. We address the theoretical foundations of IT. This is followed by an assessment of its theoretical foundations, where a number of aspects are discussed. We then turn our attention to an assessment of the empirical work on IT, where we distinguish the work that has been done utilising structural macroeconomic models, and work based in single equation techniques. The IT theoretical framework and the available empirical evidence do not appear to support the views of the proponents.

Abstract: The European Central Bank (ECB) uses a "two pillar" strategy to achieve its objective of price stability within the euro area. Even in the absence of explicit monetary targeting, stability between money and prices still affects the role of monetary aggregates in the conduct of monetary policy. The stability of the money-price link depends ultimately on the properties of the demand-for-money relationship. This paper deals with the demand-for-money functions in individual EMU countries, whether such demand functions can be identified and, where identified, whether the functions are broadly similar in different countries. A change in the ECB interest rate should trigger the same change in the short-term interest rate in all EMU countries. As a consequence, the cost of borrowing would also change, which in turn would affect the demand for bank loans. The size of this resulting effect may vary from country to country, depending on the institutional setting, and could give rise to asymmetries in the monetary mechanism. The authors find significant differences in the interest rate semi-elasticities from country to country within the EMU, which, the authors argue, could pose serious problems in the conduct of the ECB' s common monetary policy.

Resumen: El Banco Central Europeo (BCE) emplea "dos pilares" estratégicos para lograr su objetivo de estabilidad de precios dentro la zona del euro. Aun en ausencia de un objetivo monetario explicito, la estabilidad de la relación entre el dinero y los precios mantiene los efectos del papel de los agregados monetarios en la conducción de la política monetaria. La estabilidad de la relación dinero-precios depende a la larga de las propiedades de la demanda por dinero. Este artículo se ocupa de las funciones de la demanda por dinero en los distintos países de la Unión Monetaria Europea, de si tales funciones de demanda pueden ser identificadas, y en caso de que lo sean, si las funciones serán similares en los diferentes países. Un cambio en la tasa de interés del BCE provocaría un cambio idéntico en la tasa de interés en el corto plazo para todos los países de la Unión. Como una consecuencia, el costo de prestar podría además cambiar, lo cual afectará la demanda de préstamos del banco. El tamafío del efecto resultante puede variar de país a país, dependiendo del marco institucional, y ello puede dar lugar a asimetrías en los mecanismos monetarios. Los autores encuentran diferencias significativas en la semi-elasticidad de la tasa de interés de país a país dentro de la Unión: los autores argumentan que esto puede ocasionar serios problemas en la conducción de la política monetaria común por parte del BCE.

RESUMO Este artigo procura delinear o tipo de análise econômica que percebemos estar envolvida nas ideias da ‘terceira via’. No Reino Unido, o surgimento e a eleição de “novo partido trabalhista” tem sido intimamente associado ao desenvolvimento da noção de “terceira via”. Esboçamos o que vemos, como a análise de uma economia de mercado que sustenta as ideias da “terceira via”, seguida de algumas observações sobre o papel do Estado que também está envolvido. Procuramos ilustrar nossa análise por referência às declarações de política do novo governo trabalhista no Reino Unido.

ABSTRACT This paper seeks to outline the type of economic analysis which we perceive to be involved in the ideas on the ‘third way’. In the UK, the emergence and then election of “new Labour” has been closely associated with the development of the notion of the “third way”. We sketch out what we see as the analysis of a market economy which underpins the ideas of the “third way”, which is followed by some remarks on the role of the State which is also involved. We seek to illustrate our analysis by reference to the policy statements of the new Labour government in the UK.