Chapter 1: Money in Macroeconomics: Frameworks of Analysis
Rabin 01 chaps 2/15/04 3:47 PM Page 1 1. Money in macroeconomics: frameworks of analysis TWO APPROACHES TO MACROECONOMICS – SPENDING AND GOODS-AGAINST-GOODS Monetary (or money/macro) theory investigates the services and disorders of money and the relations between money, production, employment and the level of prices. We define money ‘narrowly’ as media of exchange, including currency and all transaction deposits. Reasons for this definition will become clear as we move through the book. In addition to this narrow money, ‘broad money’ includes nearmoneys that do not circulate in payments. Examples include certificates of deposit, time deposits, and in some contexts, treasury bills and commercial paper. Two approaches tackle the central questions of macroeconomics. One we call the spending approach. A second, the goods-against-goods (or Say’s Law) approach, goes further back to the fundamentals of production and the exchange of goods against goods. These two approaches reconcile. No issue arises of a right one versus a wrong one. The spending approach is potentially misleading, however, unless grounded in the fundamentals of production and exchange. Admittedly one can raise objections to the concept of total spending. According to Hutt (1979, Chapter 11), spending is an ex post notion, a money measure of exchanges accomplished, and so cannot be a determinant of nominal income or prices or anything else. (Other things being equal, the higher the prices at which a given volume of exchanges is measured, the greater the ‘spending’ observed.) This, however, is not the meaning we adopt. We stick closer to...
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