ABSTRACT

This paper seeks to look at the underlying framework of the open economy New Consensus models, providing a Post Keynesian critique. It outlines and explains briefly the main elements of and way of thinking about the macro-economy from the standpoint of both its theoretical and its policy dimensions.

There are a few problems and weaknesses with this particular theoretical framework. The critique is based on the summary from Philip Arestis, Malcom Sawyer, Alfonso Palacio -Vera and Giuseppe Fontana supported with the point of view of other post Keynesian economists. We focus here on the important aspects closely related to NCM (New Consensus Macroeconomics): the absence of banks, inflation, monetary policy from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework (Philip Arestis). The analysis is critical of NCM from Keynesian perspective.

INTRODUCTION

A New Consensus in Macroeconomics (NCM) has emerged over the past decade or so and has replaced the IS-LM model. NCM has become highly influential in terms of current macroeconomic thinking and of macroeconomic policy, especially monetary policy. The birth of NCM was made possible after the collapse of the Grand Neoclassical Synthesis in the 1970s. New Keynesian macroeconomics was transformed into what have been labeled now as New Consensus Macroeconomics.

The policy implications of the NCM paradigm are important for the development aspect of macroeconomics. Price stability can be achieved through monetary policy since inflation is a monetary phenomenon and it can only be controlled through changes in the rate of interest. Philip Arestis (2007b) reviewed the open economy aspect of the NCM, which enables some attention to be given to the exchange rate channel of the transmission mechanism of monetary policy in addition to the aggregate demand channel and the inflation expectations channel. Even though NCM as a new way thinking of the macroeconomics, it is not without its problems. There are some issues that have been occurred at the NCM and being criticized by economist including post Keynesian economists.

The New Consensus Macroeconomics Model

Philip Arestis (2009) mentioned that the NCM is a framework which there is no role for money and banking and there is only a single rate of interest. The two key of assumptions that are worth to be known are that price stability is the primary objective of monetary policy and that inflation is a monetary phenomenon which can be controlled by monetary policy and this being the rate of interest under the control of the central bank.