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Money and Banking in a Realistic Macro Model

In: Macroeconomic Theory and Macroeconomic Pedagogy

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  • Peter Howells

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.

Suggested Citation

  • Peter Howells, 2009. "Money and Banking in a Realistic Macro Model," Palgrave Macmillan Books, in: Giuseppe Fontana & Mark Setterfield (ed.), Macroeconomic Theory and Macroeconomic Pedagogy, chapter 9, pages 169-187, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29166-9_10
    DOI: 10.1007/978-0-230-29166-9_10
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    Cited by:

    1. Angel Asensio, 2019. "Endogenous interest rate with accommodative money supply and liquidity preference," CEPN Working Papers halshs-01231469, HAL.
    2. Angel Asensio, 2019. "Endogenous interest rate with accommodative money supply and liquidity preference," Working Papers halshs-01231469, HAL.

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