RE-EXAMINING THE IMPLICATIONS OF THE NEW CONSENSUS: ENDOGENOUS MONEY AND TAYLOR RULES IN A SIMPLE NEOCLASSICAL MACRO MODEL

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. Copyright © 2008 The Author. Journal compilation © 2008 Blackwell Publishing Ltd.