Share This Article:

The Poolean Consensus Model: The Strategic Scope of Monetary Policy

Full-Text HTML Download Download as PDF (Size:2252KB) PP. 68-79
DOI: 10.4236/me.2010.12007    4,771 Downloads   8,662 Views  

ABSTRACT

Some years ago (before the outbreak of the financial crisis) most of the major central banks—in general— shifted to interest rate control. But does this fact render obsolete the ISLM scheme, which is apparently tied to money supply control? And isn’t it necessary to find a solid basis for interest rate control instead of just following ad hoc policy functions? This paper is a sensible approach based on the important pioneering work of William Poole [1], which shows firstly that the static ISLM framework can be further developed for the case of interest rate control and that secondly the current financial crisis and especially the policy reactions of central banks can be explained. Thirdly also the optimization behavior of central banks can be adequately represented in the dynamic version of our model framework. Especially in times of financial and economic crises (when central banks possibly switch their monetary policy instruments back to quantitative easing), it seems to be very helpful to be able to display both interest rate control and money supply control within one single model framework. Our analysis will show that retaining the LM curve is both practical and indispensable for didactic and analytical reasons.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

F. Sell, B. Sauer and M. Wiens, "The Poolean Consensus Model: The Strategic Scope of Monetary Policy," Modern Economy, Vol. 1 No. 2, 2010, pp. 68-79. doi: 10.4236/me.2010.12007.

References

[1] W. Poole, “Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model,” Quarterly Journal of Economics, Vol. 84, No. 2, May 1970, pp. 197216.
[2] D. Romer, “ShortRun Fluctuations,” University of California, Berkeley, August 2002.
[3] F. L. Sell, “Zins und Geldmengensteuerung in Der offenen Volkswirtschaft,” WISU—Das Wirtschaftsstu dium, Vol. 35, No. 3, May 2006, pp. 363372 and 379 380.
[4] R. Clarida, J. Galí and M. Gertler, “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature, Vol. 37, No. 4, December 1999, pp. 16611707.
[5] D. Romer, “Keynesian Macroeconomics without the LM Curve,” Journal of Economic Perspectives, Vol. 14, No. 2, Spring 2000, pp. 149169.
[6] C. E. Walsh, “Teaching Inflation Targeting: An Analysis for Intermediate Macro”, Journal of Economic Education, Vol. 33, No. 4, 2002, pp. 333346.
[7] B. Friedman, “The LM Curve: A NotSoFond Farewell,” NBER Working Paper Series, No. 10123, November 2003.
[8] O. Blanchard, “Macroeconomics,” 4th Edition, Prentice Hall, 2006.
[9] R. Dornbusch, S. Fischer and R. Startz, “Macroeconomics,” 10th Edition, McGrawHill/Irwin, New Delhi, 2007.
[10] F. L. Sell and S. Kermer, “William Poole in der Offenen Volkswirtschaft,” Kredit und Kapital, Vol. 41, No. 4, 2008, pp. 467500.
[11] C. E. Walsh, “Monetary Theory and Policy,” 2nd Edition, The MIT Press, Cambridge, 2003.
[12] B. T. McCallum, “Monetary Economics—Theory and Policy,” Macmillan Publishing, New York, 1989.
[13] F. E. Kydland and E. C. Prescott, “Rules rather than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, Vol. 85, No. 3, April 1977, pp. 473 491.
[14] J. G. Lambsdorff and C. Engelen, “Das Keynesianische Konsensmodell,” Wirtschaftswissenschaftliches Studium (WiSt), Vol. 36, No. 7, August 2007, pp. 387393.

  
comments powered by Disqus

Copyright © 2018 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.