A Keynsian Model for a Post-monetarist Open Economy

I shall take as my theme the shape of economic policy in the post-monetarist era. It is not too optimistic to say that we live in a post-monetarist era. Deflationary policies for structural adjustment will no doubt continue to find favour with IMF and some OECD countries. But deflation as a cure for all ills is not new. It was favoured at all times by central bankers and urged against popular economic policies. Monetarism, though a species of deflation, is different. Monetarism put forward the idea that it was the control of money supply, assumed to be a definable, measurable and controllable aggregate, that was to be the sole instrument for achieving a reduction in the rate of inflation. It was further asserted that this would happen without any marked reduction in output or employment. As long as rational expectations and market clearing existed, the economy had only to slide down the vertical Phillips curve (see Desai. 1981).