Macroeconomics without the LM: A Post-Keynesian Perspective
AbstractRomer (2000) provides an alternative model to the AS/AD and IS/LM models that abandons the LM schedule by having the short-term interest rate set by the central bank. His framework acknowledges the critical role of the central bank in determining short-term interest rates, which moves mainstream macroeconomics closer to Post Keynesian monetary theory. The current paper presents a Post Keynesian construction of macroeconomics without an LM schedule. Rather than describing the financial sector in terms of an exogenously determined interest rate set by the central bank, the model unpacks financial markets by fully specifying a banking sector. The key analytic feature of the Post Keynesian approach is to replace the money market with the loan market. That makes transparent the macroeconomic significance of the loan market and bank behavior, and generates an endogenous money supply driven by bank lending. If banks become more optimistic over the
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Bibliographic InfoPaper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 13-2008.
Length: 37 pages
Date of creation: 2008
Date of revision:
bank lending; credit; endogenous money; loan market.;
Other versions of this item:
- Thomas I. Palley, 2008. "Macroeconomics without the LM: A Post-Keynesian Perspective," Working Papers wp179, Political Economy Research Institute, University of Massachusetts at Amherst.
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-21 (All new papers)
- NEP-BAN-2008-10-21 (Banking)
- NEP-CBA-2008-10-21 (Central Banking)
- NEP-HPE-2008-10-21 (History & Philosophy of Economics)
- NEP-MAC-2008-10-21 (Macroeconomics)
- NEP-MON-2008-10-21 (Monetary Economics)
- NEP-PKE-2008-10-21 (Post Keynesian Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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