IDEAS home Printed from
   My bibliography  Save this paper

An Important Inconsistency at the Heart of the Standard Macroeconomic Model


  • Wynne Godley

    (The Jerome Levy Economics Institute)

  • B. Anwar Shaikh

    (The Jerome Levy Economics Institute)


The standard neoclassical model is the foundation of most mainstream macroeconomics. Its basic structure dominates the analysis of macroeconomic phenomena, the teaching of the subject, and even the formation of economic policy. And of course the modern quantity theory of money and its attendant monetarist prescriptions are grounded in the model's strict separation between real and nominal variables. It is quite curious, therefore, to discover that this model contains an inconsistency in its treatment of the distribution of income which should become apparent if Walrus' law is appropriately articulated. And when this seemingly small discrepancy is corrected, without any change in all of the other assumptions, many of the model's characteristic results disappear. Two instances are of particular interest. First, the strict dichomoty between real variables and nominal variables breaks down, so that, for example, an increase in the exogenously given money supply changes real variables such as household income, consumption, investment, the interest rate, and hence real money demand. Secondly, since the price level depends on the interaction of real money demand and the nominal money supply, and since the former is now affected by the latter, price cahnges are no longer proportional to changes in the money supply. Indeed, we will demonstrate that prices can even fall when the money supply rises. The link to the quantity theory of money, and to monetarism, is severed. Patinkin in his classical work (1965) papers over the cracks in an unsatisfactory adhoc way.

Suggested Citation

  • Wynne Godley & B. Anwar Shaikh, 1998. "An Important Inconsistency at the Heart of the Standard Macroeconomic Model," Macroeconomics 9805021, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9805021 Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 19; figures: included

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Buiter, Willem H, 1980. "Walras' Law and All That: Budget Constraints and Balance Sheet Constraints in Period Models and Continuous Time Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 1-16, February.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Kakarot-Handtke, Egmont, 2012. "The rhetoric of failure: a hyper-dialog about method in economics and how to get things going," MPRA Paper 43276, University Library of Munich, Germany.
    2. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," Economics Working Paper Archive wp_891, Levy Economics Institute.
    3. Jamee K. Moudud, 2000. "Crowding In or Crowding Out? A Classical-Harrodian Perspective," Macroeconomics 0012001, EconWPA.
    4. Andrew Mearman, 2010. "What is this thing called ‘heterodox economics’?," Working Papers 1006, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    5. Li, Boyao, 2017. "The impact of the Basel III liquidity coverage ratio on macroeconomic stability: An agent-based approach," Economics Discussion Papers 2017-2, Kiel Institute for the World Economy (IfW).
    6. Kakarot-Handtke, Egmont, 2012. "Intertwined real and monetary stochastic business cycles," MPRA Paper 42793, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E - Macroeconomics and Monetary Economics

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9805021. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.