Selected Essays of Axel Leijonhufvud
Chapter 6: Monetary policy and the business cycle under 'loose' convertibility
6. Monetary policy and the business cycle under ‘loose’ convertibility Monetary theory is less abstract than most economic theory: it cannot avoid a relation to reality, which in other economic theory is sometimes missing. It belongs to monetary history, in a way that economic theory does not always belong to economic history. Sir John Hicks1 In recent literature, the Hicksian lesson that we must develop monetary theory in historical context has re-emerged in the stress that the rational expectations literature puts on ‘monetary regimes’. This development has even made the old subject of monetary standards fashionable again and an object of some genuine theoretical excitement. While this paper is not strictly speaking on the monetary economics of John Hicks,2 I hope it will be recognized as doing monetary economics in a distinctly Hicksian vein. In some previous papers,3 I have sketched a simple framework for developing a macrotheory conditional on the monetary regimes deemed to be in effect. This approach distinguishes between regimes that stabilize the nominal scale of the economy by convertibility and those that do so by controlling the quantity of money. It suggests that actual monetary regimes may be ordered, as a ﬁrst approximation, on a one-dimensional spectrum from pure ‘convertibility control’ at one extreme to pure ‘quantity control’ at the other. This paper aims to develop this conception a bit further. A SPECTRUM OF REGIMES Over the last hundred years, our monetary system has evolved from one relying on commodity convertibility to one depending...
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