The Elgar Companion to Public Choice
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The Elgar Companion to Public Choice

Edited by William F. Shughart II and Laura Razzolini

This authoritative and encyclopaedic reference work provides a thorough account of the public choice approach to economics and politics. The Companion breaks new ground by joining together the most important issues in the field in a single comprehensive volume. It contains state-of-the-art discussions of both old and contemporary problems, including new work by the founding fathers as well as contributions by a new generation of younger scholars.  
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Chapter 21: Monetary policy

Mark Toma


Mark Toma 1 Introduction The money market of modern theory is plagued by problems. The traditional economic solutions have been magic wand ones – magic monetary wands. For instance, monetary theorists have devoted much attention to the problem of a determinate general price level. The problem here is that holders of money cannot establish their current demand without knowing the current supply and whether it will be augmented in the future. The upshot is that today’s price of money and, hence, the general price level, depends on current and all future supplies. So the problem of a determinate price level is fundamentally an issue of whether money holders are able to anticipate the future time path of money. The monetary economist is quick to supply the magic wand: assume a deterministic process for generating current and all future money supplies. More imaginatively, the magic monetary wand may take the form of Milton Friedman’s famous helicopter or a conservative central banker who comes pre-equipped with a well-defined and immutable set of anti-inflation preferences (Rogoff 1985). These solutions are alike in that they solve monetary problems by introducing a supply factor from outside the model. A major theme of this chapter is that the public choice approach to monetary policy offers more satisfactory solutions because it does not involve wand waving. By modeling the incentives that real-world central bankers confront, the public choice approach is able to make the supply of money endogenous. This is real progress. A key measure of...

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