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"From the perspective of mainstream theory, the effectiveness of monetary policy in bringing down inflation depends on two very important equations: the aggregate demand equation and the infamous Phillips Curve. Without these, it becomes more difficult — or rather impossible — for central banks to carry out monetary policy and obtain the results they expect. Let me break it down."
In this short blog note, Louis-Philippe Rochon adresses three "strikes" targeted towards the mainstream theory of monetary policy. Strike one: The effect of changes in the interest rates is less important than what is predicted by mainstream models, as consumption and investments are not sensitive enough. Strike two: A realist Philips Curve is much flatter than the models, since inflation can happen at several levels of unemployment (wage-pressure curve). Strike three: Inflation is also influenced by supply shocks (cost-push inflation), making the changes of the interest rate more futile.
From a Post-Keynesian perspective anyway, the Phillips Curve is supposed to be a theoretical figment: A stable relationship between unemployment and inflation would call for a general equilibrium including full employment to exist; otherwise, there's no reason why inflation ought to rise when employment rises beyond some supposed full employment level. If, however, there is no such thing as a general equilibrium, the Phillips Curve is at best a stylised fact for a very special macroeconomic set of circumstances.