Money and Banking in a Realistic Macro Model

Peter Howells

Chapter 9 in Macroeconomic Theory and Macroeconomic Pedagogy, 2009, pp 169-187 from Palgrave Macmillan

Abstract: Abstract In the last few years there has been a long overdue recognition that the treatment of money in mainstream macroeconomics has been fundamentally erroneous. In the real world, the money supply is not exogenously determined by administrative decisions of central banks and monetary ‘shocks’ do not take the form of a disequilibrium between supply and demand working their way out through real balance effects. In practice, central banks set a nominal rate of interest at which they are willing to make reserves available to the banking system and what happens to the money supply is the outcome of a complex interaction between banks and non-bank agents involving the (income-related) demand for credit and the (portfolio-related) demand for monetary assets. This process cannot be captured by an LM curve, derived from a fixed money supply.

Keywords: Interest Rate; Monetary Policy; Central Bank; Money Supply; Banking Sector (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1007/978-0-230-29166-9_10

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