2018/37 | LEM Working Paper Series | ||||||||||||||||
Monetary theory and policy: the debate revisited |
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Jean-Luc Gaffard |
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Keywords | |||||||||||||||||
inflation, market, money, stability
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JEL Classifications | |||||||||||||||||
E31, E32, E5, E61, E62
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Abstract | |||||||||||||||||
This paper is aimed at revisiting monetary analysis in order to better
understand erroneous choices in the conduct of monetary
policy. According to the prevailing consensus, the market economy is
intrinsically stable and is upset only by poor behaviour by government
or the banking system. We maintain on the contrary that the economy is
unstable and that achieving stability requires a discretionary
economic policy. This position relies upon an analytical approach in
which monetary and financial organisations are devices that help
markets to function. In this perspective, which focuses on the
heterogeneity of markets and agents, and, consequently, on the role of
institutions in determining overall performance, it turns out that
nominal rigidities and financial commitment offer the means to achieve
economic stability. This is because they prevent successive,
unavoidable disequilibria from becoming explosive.
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