The Lessons from the Current Crisis for Macro-theory and Policy

Philip Arestis and Elias Karakitsos

Chapter 2 in The Financial Crisis, 2011, pp 12-38 from Palgrave Macmillan

Abstract: Abstract We examine the relevance of the New Consensus Macroeconomics (NCM) models in light of the current crisis. The NCM models suffer from a number of deficiencies. The policy implications advocated in NCM models are assumed rather than being derived explicitly from such models. The NCM models are based on the transversality assumption, which leads to the conclusion that commercial banks do not exist in the model, nor monetary aggregates or liquidity preference. Interestingly enough, the absence of monetary aggregates and liquidity preference may be at the root of the current crisis. The NCM models ignore the role of wealth in affecting the decisions of households to spend and save. This chapter attempts to rectify some of these drawbacks of the NCM models. In this respect the chapter highlights the potential problems a central bank is likely toface, and in view of the current crisis, when it targets just inflation and output gap to a lesser extent.

Keywords: Interest Rate; Monetary Policy; Central Bank; House Price; Euro Area (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30394-2_2

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DOI: 10.1057/9780230303942_2

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