New Consensus Macroeconomics (NCM) We refrain from reviewing the vast literature on the role of monetary policy in the working of the macro-economy and instead focus on the currently prevalent standard mainstream version of new consensus macroeconomics (NCM).5 The macro dynamics of the NCM (in its closed economy version) is usually described in terms of the following four equations: 𝑌𝑔(𝑡) = 𝛼0. [...] Since the natural rate 𝑟𝑛 is more or less fixed in the short run, the market real rate of interest falls below the natural rate setting off a cumulative expansion in output and prices, the strength of the process depending on the extent to which the market and natural rates differ. [...] The cumulative process is aborted in the presence of sticky money wages and only if the macroeconomic loss to the bond holder is about 4.75% of the initial price, in the second situation the loss on the initial price is 20%. [...] In spite of its popularity, there is virtually no recognition in the recent literature to the fact that the idea of QE not only dates back to the British economist Hawtrey but that he made contributions to the development of it as a policy tool (during the Great Depression of the 1930s) owing to his long association with the British Treasury (1919-1944). [...] To quote Laidler (2006, p.157-158) “ (in the credit deadlock) the problem is not a high elasticity of the economy’s demand for money with respect to the long rate of interest, but a low elasticity of its demand for bank credit with respect to the short rate… The solution to a credit deadlock …is vigorous open market operations to bring about an increase in the monetary base and therefore the suppl.
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