The role of commercial banks and financial intermediaries in the new consensus macroeconomics (NCM): A preliminary and critical appraisal of old and new models

Giuseppe Fontana and Marco Veronese Passarella in this chapter, entitled, ‘Aggregate Demand, Money and Finance in the New Consensus Macroeconomics: a Critical Appraisal’, critically assess the ‘New Consensus Macroeconomics’ (NCM) theory and its recent developments. Building on the Wicksellian ‘two-interest rates model’, the NCM highlights the role of interest rates in the transmission mechanism of monetary policy, whereas monetary aggregates are treated as residual variables. However, in contrast with Wicksell’s theory, banks and financial institutions are usually neglected in the NCM theory. As a result, the financial instability and recurrent banking crises of modern economies have received little attention in modern macroeconomics. This chapter has three main goals. First, it aims to provide a critical analysis of the original NCM model and some recent developments. Second, it aims to show that few amendments to it are sufficient to account for the financial instability and banking crises of real-world economies. Third, it shows that some important policy-making conclusions logically follow once the role of banks, credit and finance is properly taken on board.