Chapter 7: An Alternative Monetary Model of Inflation and Economic Growth
7. An alternative monetary model of inﬂation and economic growth INTRODUCTION This chapter presents a model which combines features of what Keynes (1933) called a ‘monetary production economy’ and Wicksell (1898) called a ‘pure credit economy’. Production takes time and is ﬁnanced by loans from ﬁnancial institutions or ‘banks’. The nominal liabilities of the ﬁnancial institutions also represent the only exchange media circulating in the system. The objective of productive activity is to realize monetary proﬁts denominated in terms of bank liabilities. Money is created when loans are extended, and is destroyed via the ‘law of reﬂux’ when loans are repaid, thus giving rise to the characteristic problems of the monetary circuit (Graziani, 1990; Parguez, 1996). The argument follows Hicks (1982, 1989) in asserting that this structure is as least as reasonable a simpliﬁcation of contemporary economic reality for theoretical purposes as (say) the assumption of a pure commodity money economy might have been in the heyday of the quantity theory.1 As suggested in the Post Keynesian literature on endogenous money (Kaldor, 1986; Moore, 1988; Lavoie, 1992; Rochon, 1999) in such an environment a short-term rate of interest, rather than the rate of growth of an outside monetary base, is the relevant monetary control variable. Moreover, in current conditions the monetary authorities will likely attempt to target the short-term real rate rather than the nominal rate (Taylor, 1993; Lavoie, 2000; Goodhart, 2002). This they can do by continuously adjusting the administered setting of the nominal rate...
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