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The Lessons from the Current Crisis for Macro-theory and Policy

In: The Financial Crisis

Author

Listed:
  • Philip Arestis
  • Elias Karakitsos

Abstract

We examine the relevance of the New Consensus Macroeconomics (NCM) models in light of the current crisis. The NCM models suffer from a number of deficiencies. The policy implications advocated in NCM models are assumed rather than being derived explicitly from such models. The NCM models are based on the transversality assumption, which leads to the conclusion that commercial banks do not exist in the model, nor monetary aggregates or liquidity preference. Interestingly enough, the absence of monetary aggregates and liquidity preference may be at the root of the current crisis. The NCM models ignore the role of wealth in affecting the decisions of households to spend and save. This chapter attempts to rectify some of these drawbacks of the NCM models. In this respect the chapter highlights the potential problems a central bank is likely toface, and in view of the current crisis, when it targets just inflation and output gap to a lesser extent.

Suggested Citation

  • Philip Arestis & Elias Karakitsos, 2011. "The Lessons from the Current Crisis for Macro-theory and Policy," Palgrave Macmillan Books, in: Philip Arestis & Rogério Sobreira & José Luis Oreiro (ed.), The Financial Crisis, chapter 2, pages 12-38, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-30394-2_2
    DOI: 10.1057/9780230303942_2
    as

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