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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 4: Short-Run Non-Neutralities, Nominal Rigidities, Misperceptions and the Concept of the Phillips Curve

John Smithin


INTRODUCTION When asking the question how the activities of the ‘monetary authorities’ such as central banks affect the actual economy, the most popular answer has usually been that they can only have a transitory effect, at most, on the so-called ‘real’ economic variables. The conviction is that ultimately monetary changes can only affect inflation rates. This was certainly the position of the monetarist school, for example, as discussed in the previous chapter. There have obviously been challenges to this point of view over the centuries, but the present era seems to be characterized, once again, by a particularly firm belief on the part of most economists in the doctrine of the ‘long-run neutrality of money’. This may be why, for example, professional opinion is apparently so sanguine about the consequences of such things as deliberately deflationary policies at the national level, and such concentrations of international financial power as the ‘single currency’ in Europe or ‘dollarization’ in the Americas. Whenever it seems that in practice there have been definite consequences of monetary changes on economic activity (in either direction) it is explained that these can only be of a short-run or temporary nature, caused by such things as ‘nominal rigidities’, ‘ wage/ price stickiness’ or ‘misperceptions’, and are therefore bound to disappear eventually. The purpose of the present chapter is to pursue this type of argument in more detail. Another way of looking at this material is as a (partial) exposition of what Krugman (2002)...

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