Monetary theory and policy : the debate revisited
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.
Domains
Economics and Finance
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