The ‘Pure Science’ Approach To Economics And Monetary Policy
AbstractPerceptions of money do influence monetary policy, and monetary policy does have an impact on the functioning of the economy. For instance, a high interest rate policy usually entails high levels of bankruptcies and unemployment. Also, given a loss of confidence in the issuing authority (monetary dislocation), paper money can and does fail in all its functions as a medium of exchange, a unit of account, and a store of nominal value. In a money economy in which nominal money is the medium of exchange, nominal money prices reflect the underlying exchange ratios of the various commodities that are produced and exchanged for nominal money. In the absence of monetary dislocation (monetary revaluation or devaluation), any change in the nominal price of a commodity reflects a change in its purchasing power (a change in its exchange ratio vis-a-vis other commodities). Monetary policy prescriptions, which ignore this reality, result in significant displacement costs to members of society. A ‘pure science’ approach to economic research engenders policy prescriptions based upon assumptions of the economic system which are not aligned with the empirical reality. Hence, to avoid severe social costs, the ‘pure science’ approach to economics needs to be modified to deal with social reality.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0502033.
Length: 18 pages
Date of creation: 28 Feb 2005
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monetary policy decisions; economic policy; federal funds target range; purchasing power uncertainty; interest rate targeting; reserves targeting; instruments for the prediction of observable phenomena.;
Find related papers by JEL classification:
- E - Macroeconomics and Monetary Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-CBA-2005-04-16 (Central Banking)
- NEP-MAC-2005-04-16 (Macroeconomics)
- NEP-MON-2005-04-16 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
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