DOES INFLATION TARGETING INCREASE THE DEFLATIONARY BIAS IN THE WORLD ECONOMY?1

Post Keynesian economists have now embraced endogenous money and exogenous interest rates for 30 years. Nevertheless the IS-LM diagram, with its explicit assumption of monetary exogeneity and interest rate endogeneity remains widely accepted by most mainstream economists, and still appears in most money & banking and macroeconomic textbooks. Post Keynesians recognize that interest rates do not adjust as the textbooks maintain to equilibrate saving and investment or the supply and demand for “loanable funds. ” Bank Rate (BR) is now widely recognized as the main instrument of monetary policy, set exogenously by the CB to achieve its stabilization targets and maintained at that level between interest rate meetings. By an arbitrage process other short-term market rates are held equal to BR plus a specific asset differential, reflecting expected differences in liquidity, maturity, collateral and tax status, and borrowers ’ risk among securities. Long term rates are also determined by an arbitrage process, and held equal to the capital markets’ expectations of future values of BR plus a positive maturity premium, which reflects creditors ’ preferences to hold assets of shorter maturity than debtors’ preferences to issue securities. 1 This lecture is a summary of selected material from my forthcoming book, SHAKING THE INVISIBL