Chapter 1: Money and Economic Theory and Policy
1. Money and economic theory and policy INTRODUCTION The role of money in the economy and the impact, if any, of monetary changes on overall economic performance have always been a matter of intense controversy and dispute within economics. A substantial proportion of economic theory and thinking about economic policy actually assigns no role to money, or at least a very minor role, in the determination of the ‘real’ economic variables that are thought to be of primary interest. This was certainly true, for example, of neo-Walrasian general equilibrium theory, which at one time had claims to be the apex of ‘high theory’ (Hahn, 1983). Within macroeconomics a popular area of research towards the end of the twentieth century was the so-called ‘real business cycle’ (RBC) model (Kydland and Prescott, 1982; Snowdon and Vane, 1997; Ryan and Mullineux, 1997) whose name is self-explanatory. Similarly, neoclassical long-run growth models (Jones, 1998; Snowdon and Vane, 1997), whether or not they allow for ‘endogenous growth’ (Romer, 1986), have also tended to focus almost exclusively on non-monetary factors, such as the accumulation of physical capital, technological innovations and the growth of ‘knowledge’ (that is, technical expertise). Finally, there have even been several versions of so-called ‘Keynesian economics’, which have interpreted Keynes as asserting that money does not matter, in spite of the fact that the full title of Keynes’s most famous work was The General Theory of Employment Interest and Money (1936). As noted by Smithin (2000), this apparent neglect of the role of...
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