Chapter 4: Macroeconomic Theories
The Microfoundations of Money The need for a non-Walrasian paradigm has sometimes been recognized in monetary theory, though writers often try to keep a foot in both camps. I have already commended David Barnett’s insistence on the theoretical ‘high road’, meaning that any theory of money should be strictly logical and broadly consistent with the facts. In an article in the ‘Microeconomics and Money’ controversy in the Economic Journal he writes: The high road insists upon internal coherence among data, theory, and econometrics, and it is that internal consistency that defines the high road. (Barnett 1997, p. 1175) Unfortunately, the specific route that Barnett recommends is not really an option, because apart from coherence he has another definition in mind. He argues that the demand for money can be explained by the use of ‘Divisia aggregates’, which replace simple measures of money with a complex index of liquidity that is derived from numerous assets. But although it would be ideal to have a set of perfect economic indices, the only way to derive them would be to solve the trillions of equations in the economic mega-system. Since perfect indices require perfect information, which no one has, all indices are fallible, and no one index is best in all possible situations. ‘In practice’, notes Paul Mizen, ‘Divisiamodellers appear to have devised a vehicle with efficient suspension which gives the 69 70 A Critique o Macroeconomics f impression that the road is smooth when in reality the bumps are still there’ (Mizen...
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