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The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts

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  • C. A. E. GOODHART

Abstract

Lionel Robbins was concerned about the methodology of economic science. When he discussed the relationship between theory and ‘reality’, two of the examples of inappropriate relationships were taken from monetary economics. Such shortcomings continue. Among the worst are: (1) IS/LM: whereby the monetary authorities set the monetary base, and the interest rate is market determined; (2) the monetary base multiplier of bank deposits, and the role of reserve ratios; (3) the current three‐equation neoclassical consensus, assuming perfect creditworthiness, and hence no need for banks; (4) the analysis of the evolution of money.

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  • C. A. E. Goodhart, 2009. "The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts," Economica, London School of Economics and Political Science, vol. 76(s1), pages 821-830, October.
    • Handle: RePEc:bla:econom:v:76:y:2009:i:s1:p:821-830
    DOI: 10.1111/j.1468-0335.2009.00790.x
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