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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)


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.

Suggested Citation

  • Elias Karakitsos, 2008. "The 'New Consensus Macroeconomics' in the Light of the Current Crisis," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 11(2), pages 89-111, Winter.
  • Handle: RePEc:ekn:ekonom:v:11:y:2008:i:2:p:89-111

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    References listed on IDEAS

    1. Hakkio, Craig S. & Rush, Mark, 1991. "Cointegration: how short is the long run?," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 571-581, December.
    2. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    3. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    4. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-350, June.
    5. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    6. Makinen, Gail E., 1986. "The Greek Hyperinflation and Stabilization of 1943–1946," The Journal of Economic History, Cambridge University Press, vol. 46(03), pages 795-805, September.
    7. Makinen, Gail E., 1988. "The Greek Hyperinflation and Stabilization of 1943–1946: A Reply," The Journal of Economic History, Cambridge University Press, vol. 48(01), pages 140-142, March.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects


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