Modern Monetary Macroeconomics
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Modern Monetary Macroeconomics

A New Paradigm for Economic Policy

Edited by Claude Gnos and Sergio Rossi

This timely book uses cutting-edge research to analyse the fundamental causes of economic and financial crises, and illustrates the macroeconomic foundations required for future economic policymaking in order to avoid these crises.
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Chapter 5: Inflation and the circuit of income

Xavier Bradley and Pierre Piégay


The analysis of the economic system in terms of a circular flow of incomes has always had the appeal of integrating money directly into the productive system. However, the extension from an elementary circuit wherein monetary incomes are earned by wage earners and then spent on buying consumption goods to a complex dysfunctional economy has always been problematic. For example, to deal with inflation the traditional circular flow approach considers that the two symmetrical operations, namely the initial creation and the final destruction of monetary incomes, are separated by a period of time during which the amount of money available in the system may be increased. The problem with this interpretation is that, if monetary ‘events’ do indeed happen in between the ‘extremes’ of the circuit, then money is given back its autonomy compared to goods, and this restores a form of dichotomy between monetary and real magnitudes. The traditional conception of the circuit of monetary incomes appears therefore to be caught between a coherent but useless description of a simplistic world and a simple reworking of a well-known approach.

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