Monetary Policy and Central Banking

Monetary Policy and Central Banking

New Directions in Post-Keynesian Theory

Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye

Divided into two parts, this book presents a detailed, multi-faceted analysis of banking and monetary policy. The first part examines the role of central banks within an endogenous money framework. These chapters address post-Keynesian interest rate policy, monetary mercantilism, financial market organization and developing economies. In the second part of the book, the focus switches to the analysis of the financial crisis that began in 2007. The chapters in this section discuss the role of central banks in times of crisis.

Chapter 3: Capitalism in One Country? A Re-examination of Mercantilist Systems from the Financial Point of View

Eric Kam and John Smithin

Subjects: economics and finance, financial economics and regulation, money and banking, post-keynesian economics


Eric Kam and John Smithin* INTRODUCTION 1 Kam and Smithin (2008) use the term “monetary mercantilism” not to refer to protectionism as such, but rather a general policy of stimulating aggregate demand, and hence full employment, economic growth, general prosperity, and so on, by various financial and monetary techniques. These might include, for example, a monetary policy that delivers low and stable real interest rates (Smithin, 2003, 2007, 2009), or Keynesiantype expansionary fiscal policy. We note that Humphrey (1998) also uses the expression “mercantilism” (without the qualifier) in a somewhat similar way, casting the entire history of economic thought as a contest between “mercantilism” and “classical economics”, with figures such as John Law, James Stueart, Thomas Tooke, John Maynard Keynes and Nicholas Kaldor on the one side, and David Hume, Adam Smith, Henry Thornton, David Ricardo and Milton Friedman, on the other. According to Humphrey (1998: 2): This policy prescription [protectionism] was, of course, the mercantilist’s main claim to fame. But the hallmark that secures them a permanent niche in the history of monetary doctrines was their contra- or anti-quantity theory of money. As far as the international situation is concerned, the expectations of those pursuing such “mercantilist” strategies (as now defined) might well have been that along with higher growth they would also lead to a strong current account, and (perhaps most obviously under a system of floating exchange rates) the building up of a foreign credit position, rather than becoming indebted either to other nations or to international...

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