The role of money in four UK macroeconomic models: a comparison and an evaluation
The study compares and evaluates the role of money in four macroeconomic models - the H.M. Treasury, the London Business School, the National Institute of Economic and Social Research, and a post-Keynesian model. This study can be subdivided into two parts - chapters two and three analyse the historical and theoretical background of monetary economics, whilst chapters four and five examine how the models capture various aspects of money. Chapter two analyses the nature of financial innovation, with particular reference to the banking sector. The growing importance attributed to the liabilities of the non-bank financial institutions, facilitated by deregulation and information technology, is emphasised. This rapid evolution has important consequences for the construction of macroeconomic models, which must now capture the activities of all financial institutions and the effect of financial innovation on both the monetary and real sectors. Chapter three discusses the evolution of monetary theory, in both a closed and open economy, with particular emphasis placed upon the channels of influence, given an expansionary monetary policy. Particular concern centres on the post-Keynesian doctrine, which emphasises the importance of `credit-money' in a capitalist-production economy. Acceptance of this doctrine questions the viability of orthodox theories. Chapter four reproduces stylised versions of the external monetary sector. Emphasis is placed upon those equations that constitute the transmission mechanism. The contributions of financial innovation and theory are also stressed. Finally chapter four compares and evaluates how various monetary aspects are incorporated into the four models. These aspects are the roles of: i) financial innovation; ii) monetary control; iii) information technology; iv) monetary theory; and v) the interaction with the real sector. The models place different weights upon these aspects. The role of financial innovation is largely ignored by the orthodox models, in keeping with their theoretical beliefs. Whereas, in accordance with the post-Keynesian doctrine, the PK model emphasises its importance. The weight placed on the theoretical aspect is particularly acute in the LBS model. However, one important proviso for all the orthodox models is the utilisation of post-Keynesian mark-up models. The four models also emphasise different channels of influence, in accordance with their theoretical beliefs. Consequently, four alternative views of money in macroeconomic models are forthcoming.
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