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New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos


  • Willem H. Buiter


Monetary theory and policy are part of intertemporal public finance. The two "ghosts" are the liquidity trap and the real balance effect. The "eccentricities" are negative nominal interest rates and the helicopter drop of money. The "fallacy" is the Fiscal Theory of the Price Level, a logically inconsistent theory of the link between the government's intertemporal budget constraint and the general price level. The "mirage" is the prediction that financial deregulation and technical change in the payments and settlements technology will cause monetary policy to lose its capacity to influence even nominal economic variables. "Mythos" refers to the independent central bank. Copyright 2005 Royal Economic Society.

Suggested Citation

  • Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages 1-31, March.
  • Handle: RePEc:ecj:econjl:v:115:y:2005:i:502:p:c1-c31

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    References listed on IDEAS

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    Cited by:

    1. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
    2. Buiter, Willem H., 2007. "Seigniorage," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 1, pages 1-49.
    3. Bagus, Philipp & Howden, David, 2014. "Central Bank Insolvency: Causes, Effects and Remedies," MPRA Paper 79605, University Library of Munich, Germany.
    4. Kais Saidi & Lobna Hassen & M. Hammami, 2015. "Econometric Analysis of the Relationship Between ICT and Economic Growth in Tunisia," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 6(4), pages 1191-1206, December.
    5. Buiter, Willem H., 2017. "The Fallacy of the Fiscal Theory of the Price Level - Once More," CEPR Discussion Papers 11941, C.E.P.R. Discussion Papers.
    6. Koppány, Krisztián, 2007. "Likviditási csapda és deflációs spirál egy inflációs célt követő modellben - a hitelesség szerepe
      [A liquidity trap and deflationary spiral in a model for pursuing an inflation target - the role of
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 974-1003.
    7. Gomes, S. & Jacquinot, P. & Mestre, R. & Sousa, J., 2015. "Global policy at the zero lower bound in a large-scale DSGE model," Journal of International Money and Finance, Elsevier, vol. 50(C), pages 134-153.
    8. Buiter, Willem H., 2006. "How Robust is the New Conventional Wisdom? The Surprising Fragility of the Theoretical Foundations of Inflation Targeting and Central Bank Independence," CEPR Discussion Papers 5772, C.E.P.R. Discussion Papers.
    9. Eugene Amromin & Sujit Chakravorti, 2007. "Debit card and cash usage: a cross-country analysis," Working Paper Series WP-07-04, Federal Reserve Bank of Chicago.
    10. Monique Florenzano & Stella Kanellopoulou & Yiannis Vailakis, 2006. "Equilibrium of incomplete markets with money and intermediate banking system," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00112209, HAL.
    11. Willem Buiter, 2005. "Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency," International Economics and Economic Policy, Springer, vol. 2(2), pages 189-200, November.
    12. repec:hal:journl:halshs-00112209 is not listed on IDEAS
    13. Bagus, Philipp & Howden, David, 2014. "Fiscal Considerations of Central Bank Recapitalization," MPRA Paper 79606, University Library of Munich, Germany.
    14. repec:ulp:buopee:v::y:2011:m:06:i:5 is not listed on IDEAS
    15. Buiter, Willem H., 2006. "The elusive welfare economics of price stability as a monetary policy objective: why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank.
    16. Soldatos, Gerasimos T., 2015. "Global Recession: A Money Gift Cure Possibly," MPRA Paper 66535, University Library of Munich, Germany.
    17. Buiter, Willem H., 2017. "The Good and the Bad Fiscal Theory of the Price Level," CEPR Discussion Papers 11975, C.E.P.R. Discussion Papers.
    18. Buiter, Willem H. & Sibert, Anne C., 2017. "The fallacy of the fiscal theory of the price level - one last time," Economics Discussion Papers 2017-84, Kiel Institute for the World Economy (IfW).
    19. VAN HOVE, Leo, 2007. "Central Banks and Payment Instruments: a Serious Case of Schizophrenia," MPRA Paper 5281, University Library of Munich, Germany.
    20. Buiter, Willem H., 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
    21. W.H. Buiter, 2007. "Is Numérairology the Future of Monetary Economics? Unbundling numéraire and medium of exchange through a virtual currency and a shadow exchange rate," CEP Discussion Papers dp0776, Centre for Economic Performance, LSE.
    22. Buiter, Willem, 2014. "Central Banks: Powerful, Political and Unaccountable?," MPRA Paper 59477, University Library of Munich, Germany.
    23. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69, April.
    24. Ali al-Nowaihi & Paul Levine & Alex Mandilaras, 2006. "Central Bank Independence and the `Free Lunch Puzzle': A New Perspective," School of Economics Discussion Papers 0806, School of Economics, University of Surrey.

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