Money and banking in a realistic macro-model
Howells, P. (2009) Money and banking in a realistic macro-model. In: Fontana, G. and Setterfield, M. , eds. (2009) Macroeconomic Theory and Macroeconomic Pedagogy. London: Palgrave Macmillan, pp. 169-187. ISBN 9780230202030
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In this paper, in section 2, we review the latest suggestions for dispensing with the LM curve, focusing primarily on the (quite similar) Bofinger, Mayer and Wollmershäuser (2005) and Carlin and Soskice (2005 and 2006) approaches. The novelty, however, lies in section 3 with the further development of these models in such a way that incorporates the behaviour of the banking sector. In section 4 we ‘test’ the legitimacy of this development by showing how the effects of a shock emerging from the macro part of the model can be traced through the banking sector where it produces perfectly sensible outcomes. The same section also provides a test of the model (reversing direction) by showing how the effect of a recent disturbance originating in the banking sector, the alarm over sub-prime lending, can be incorporated in the banking sector of the model and followed through to the macro part where again they show sensible results.
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