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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 9: Inflation and the Economy

John Smithin


9. Inflation and the economy INTRODUCTION As will be obvious from the discussion in the preceding chapters, one of the persistent themes in monetary economics has been the idea that inflation is a major social problem. Given also that the majority of monetary theories, particularly in the quantity theory tradition, have stressed the link between money and prices, the corollary has usually been that the primary objective of monetary policy should be to reduce or eliminate inflation. Yet at the same time most of these schools of thought have usually also admitted that monetary policy has at least some impact on real economic variables such as output and employment, while disputing whether this is of a temporary or permanent nature. Obviously, therefore, difficult issues of political economy can and do arise in situations where choices must apparently be made between competing monetary policy objectives. This being the case, it might have been thought that one of the main tasks which monetary economists should have performed is to provide a clear and persuasive analysis of just why high (or these days even moderately high) inflation rates are seen as so damaging to the economy that the mere threat of inflation is enough to justify severe corrective action. Yet, remarkably, this is the one thing that the economics profession has conspicuously failed to do. This is not to deny that a certain amount of fairly sophisticated analysis along these lines has been attempted. However, most of...

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