Re-examining the implications of the new consensus: Endogenous money and Taylor rules in a simple neoclassical macro model

Publisher:
Wiley-Blackwell Publishing
Publication Type:
Journal Article
Citation:
Metroeconomica: International Review of Economics, 2009, 60 (3), pp. 495 - 524
Issue Date:
2009-01
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This paper re-examines the impact of endogenous money in a neoclassical model with interest-sensitive expenditures. It first outlines a benchmark model with exogenous money and the usual full employment and money growth-determined inflation results. It then replaces exogenous money with endogenous money, which is shown to generate model indeterminacy. Two methods of resolving this indeterminacy are then explored: money illusion and a Taylor rule for monetary policy, a key feature of new consensus models. The paper concludes that endogenous money has negative implications for the behaviour and interpretation of neoclassical and new consensus models.
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