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The 'New Consensus Macroeconomics' in the Light of the Current Crisis

  • Elias Karakitsos

    (Centre of Economic and Public Policy, Department of Land Economy, University of Cambridge)

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    The paper analyses the current credit crisis and finds that NCM or Neo-Wicksellian models are inadequate to detect the roots of the crisis, let alone to deal from a policy perspective with the problems and the cures. It attempts to rectify some of these drawbacks of the NCM models and in the way monetary policy should be designed. First, it suggests that the policymakers' objective function should be augmented to include a target on asset price inflation in a way that does not impede the free functioning of financial markets. The variable that suggests itself as target is the household net wealth as percent of disposable income. Second, it introduces a wealth effect in consumption, which is necessary if the effect of bubbles is to be detected and ultimately prevented. Third, it endogenises the wealth effect in cunsupmtion by explaining separately financial and housing wealth in a rudimentary way. Fourth, it endogenises potential output and the natural interest rate so that erroneous policy implications are bypassed.

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    Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.

    Volume (Year): 11 (2008)
    Issue (Month): 2 (Winter)
    Pages: 89-111

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    Handle: RePEc:ekn:ekonom:v:11:y:2008:i:2:p:89-111
    Contact details of provider: Web page: http://www.ekonomia.ucy.ac.cy/

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