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A Simple (and Teachable) Macroeconomic Model with Endogenous Money

In: Macroeconomic Theory and Macroeconomic Pedagogy

Author

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  • Giuseppe Fontana
  • Mark Setterfield

Abstract

According to Romer (2000), the IS-LM framework has outlived its usefulness as the basic model for teaching undergraduate students about short-run macroeconomic fluctuations. This is because central banks no longer use monetary aggregates as the instrument of monetary policy (as per the assumptions of the IS-LM model), but instead conduct policy by manipulating interest rates (see also Blinder 1997; Taylor 1997; Walsh 2002). Romer’s solution to this problem involves replacing the LM curve with an MP (monetary policy) curve that describes how central banks manipulate interest rates in response to macroeconomic outcomes such as variations in inflation and/or the level of real economic activity. The result is what has come to be known as the ‘New Consensus’ model, in which the central bank varies the interest rate in order to anchor the rate of inflation at its chosen target value, while real activity is governed by a natural rate of unemployment or NAIRU.1 Simple and teachable variants of this model have already been developed by, for example, Taylor (2000), Carlin and Soskice (2005), and Jones (2008).

Suggested Citation

  • Giuseppe Fontana & Mark Setterfield, 2009. "A Simple (and Teachable) Macroeconomic Model with Endogenous Money," Palgrave Macmillan Books, in: Giuseppe Fontana & Mark Setterfield (ed.), Macroeconomic Theory and Macroeconomic Pedagogy, chapter 8, pages 144-168, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29166-9_9
    DOI: 10.1007/978-0-230-29166-9_9
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    1. repec:ilo:ilowps:485510 is not listed on IDEAS
    2. Marco Missaglia & Alberto Botta, 2024. "Households’ Liquidity Preference, Banks’ Capitalization and the Macroeconomy: A Theoretical Investigation," Review of Political Economy, Taylor & Francis Journals, vol. 36(3), pages 1192-1215, July.
    3. Godar, Sarah. & Paetz, Christoph. & Truger, Achim., 2014. "Progressive tax reform in OECD countries : perspectives and obstacles," ILO Working Papers 994855103402676, International Labour Organization.
    4. Achim Truger, 2013. "Steuerpolitik im Dienste der Umverteilung: eine makroökonomische Ergänzung," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 82(1), pages 43-59.
    5. Marc Lavoie & Severin Reissl, 2019. "Further insights on endogenous money and the liquidity preference theory of interest," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(4), pages 503-526, October.
    6. Bibi, Samuele, 2023. "Money in the time of crypto," Research in International Business and Finance, Elsevier, vol. 65(C).
    7. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.
    8. Bibi, Samuele & Canelli, Rosa, 2023. "The interpretation of CBDC within an endogenous money framework," Research in International Business and Finance, Elsevier, vol. 65(C).

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