Fiscal policy in the monetary theory of production: An alternative to the “new consensus” approach

The main policy prescription of the so-called new consensus view consists in maintaining that price stability can be achieved through monetary policy, via changes in the rate of interest. In particular, it is stressed that – once fixed the inflation target – interest rate must be increased (reduced) if the rate inflation is higher (lower) than its target. Importantly, the output gap can be reduced via the reduction in the interest rate, in all cases where inflation is below its target value. Starting from the idea that these results derive from the erosion of public intervention in all economic countries (at least) in the last decade, this paper explores the idea that an alternative model can be taken into consideration, based on the conviction that restrictive monetary policies are unable to control inflation, and that fiscal policies are more effective for the sake of increasing employment and output, without negative impacts on the inflation rate. A model is proposed, which falls within the theoretical context of the monetary theory of production (with endogenous money), where public expenditure, by increasing employment, determines an increase in money wages. This, in turn, due to the operation of the ‘high wages effect’, generates an increase of labour productivity. It is shown that a high-wage policy – driven by public expenditure - is effective for the purpose of increasing employment only if the banking system is accommodating