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Controversies in Monetary Economics

Revised Edition

John Smithin

This influential volume, which has been revised and updated for the twenty-first century, includes both new material and more detailed expositions of existing arguments. Although so-called ‘real’ theories of business cycles and growth are prevalent in contemporary mainstream economics, Controversies in Monetary Economics suggests that those economists who have instinctively focused on monetary factors in explaining macroeconomic behaviour are more genuinely ‘realistic’. The author combines an explanation of past and present monetary controversy with practical proposals for the conduct of monetary policy in the contemporary global economy. Several alternative approaches are discussed, ranging from the traditional quantity theory to post Keynesian theories of endogenous money.
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Chapter 1: Money and Economic Theory and Policy

John Smithin


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 money in the socioeconomic system cannot be...

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