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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 8: The International Economy and Alternative Exchange Rate Regimes

John Smithin


INTRODUCTION Up to this point the discussion has assumed the existence of a single selfcontained monetary network dominated by a central bank-type institution whose liabilities represent both the standard of value (unit of account) and the agreed ultimate means of payment (medium of settlement) of the system. The liabilities of this institution are the base of an inverted pyramid of other financial assets which may have heterogeneous risk characteristics, but which are generally acceptable as alternate exchange media on varying terms. The interest rate policy of the central bank sets the tone for the structure of interest rates throughout the system. In the present chapter, however, the closed economy assumption of a single financial network will be dropped, and the focus of the discussion will be the coexistence of a number of competing financial networks, each with a different standard of value and a different financial centre. This then immediately raises issues involving the interaction of the competing centres, the rates of exchange between the different standards of value, and contradictions between the interest rate policies prevailing in each bloc. FINANCIAL NETWORKS AND NATIONAL ECONOMIES Historically, the competing networks have been identified with the boundaries of nation states, for the simple reason that the coercive power of the state, including such devices as the power of taxation and legal tender laws, has made state-owned or state-dominated central banks the natural candidates for the role of the financial centre in each jurisdiction. In many cases, therefore, discussion...

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