Teaching the New Consensus Model of ‘Modern Monetary Economics’ from a Critical Perspective: Pedagogical Issues

The evolution of the textbook treatment of macroeconomics and monetary economics would be a fascinating subject in its own right, for anyone with the time and energy to pursue it. From the publication of the first modern textbooks in the late 1940s, up to the early 1970s, so-called ‘Keynesian’ models,1 stressing the importance of aggregate demand, were the order of the day (even if some bore little resemblance to anything in the writings of J.M. Keynes). Then, from roughly the late 1970s to the early 1990s, standard textbook fare was clearly based on monetarism,2 the twentieth-century version of the quantity theory of money, actually with something of a lag compared to events in the real world, as in practice central banks had been forced to abandon the monetary targeting experiments of the 1979–82 period almost as soon as they had started. Finally, from the mid-1990s onwards a new textbook orthodoxy has developed in the form of a simple three-equation neo-Wicksellian model, the most salient features of which are that the monetary policy instrument is an interest rate (the ‘policy rate’), and that the supply of money and credit becomes endogenous. The reason for this latest change is that it became impossible for textbook orthodoxy to go on making statements to the effect that central banks ‘cannot control interest rates’ and so on, at a time when the central banks themselves were saying and doing the opposite (for example, by posting interest rate targets on their websites and publicizing any changes), and questions of interest rate policy had become close to an obsession in the news media dealing with financial affairs.