A Handbook of Alternative Monetary Economics
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A Handbook of Alternative Monetary Economics

Edited by Philip Arestis and Malcolm Sawyer

This major Handbook consists of 29 contributions that explore the full range of exciting and interesting work on money and finance currently taking place within heterodox economics. There are many themes and facets of alternative monetary and financial economics but two major ones can be identified.
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Chapter 14: Monetary Policy

James Forder


James Forder The Phillips curve and Friedman’s proposal It is difficult not to be struck by the high proportion of economists who assent to the doctrine of the neutrality of money. Just as notable, perhaps, although much less often noted, is the degree of agreement on a picture of how – as a result of what came to be called ‘the monetarist counter-revolution’ – that consensus emerged. This picture is not only routinely presented in textbooks, but can also be found to underlie numerous policy statements, to motivate institutional design, and even to be assumed in political memoirs. And indeed, in certain important respects, it might be more important in shaping today’s policymaking environment than the doctrine of ‘the classical dichotomy’ itself. In the form in which they have been accepted, these things were most clearly popularized in Friedman’s (1977) Nobel Lecture. He attributed the deterioration in performance before then to a mistaken belief among policymakers that there existed an exploitable tradeoff between inflation and unemployment in the manner superficially suggested by the work of Phillips (1958). Friedman’s view was that as policymakers acted on this idea and raised inflation, unemployment fell temporarily, but only so long as the inflation was unanticipated or its effects misunderstood by wage bargainers. In the longer term, unemployment would return to its ‘natural rate’, but with inflation at a higher level. From there policymakers could still lower unemployment, but only with even greater inflation so that the additional...

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