Towards Holistic Theory of Money: Overcoming Twentieth Century Neoclassical Monetary Paradigm

The present paper is about rethinking and reformulating conventional assumptions concerning monetary economics. The money homogeneity and neutrality are rejected. New formulation of money market is suggested. It is demonstrated that money market is entangled with all the other markets and that the system of markets, including money, does not converge to equilibrium. Only under the gold standard some kind of self-regulation may be observed. Appropriate monetary and fiscal policies do not distort, but increase the efficiency of market forces. The introduction of internal money issued by private banking sector does not improve the situation and does not guarantee stability. Further, if we institute external value (exchange rate) of money, the basic conclusions are not altered. Flexible exchange rates require autonomous monetary policy and also rule out automatic equilibrium convergence. Prevailing floating exchange rate monetary regimes imply in addition dominance of internationally cooperative equilibrium based on mutually consistent macroeconomic policies. This implicit macroeconomic coordination precedes the international liberalization and deregulation, so, paradoxically the driving force behind globalization is the broadening of the scope of macroeconomic regulation. Finally, money uncertainty principle is introduced and connection between maximum entropy rule, economic uncertainty and money is established. The conclusions of the paper are related to certain basic Keynesian postulates about money.