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Monetary Theory and Policy in a Global Context with a Large International Debt

In: Monetary Theory and Monetary Policy

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  • Paul Davidson

Abstract

Neoclassical monetary theory is divided on the role of monetary policy in the real world. Under the traditional monetarist approach, changes in the quantity of money directly affect the price level of all goods without any long-run effects on employment and output. Under the orthodox neoclassical synthesis Keynesian approach, on the other hand, monetary policy directly, and only, affects the price of bonds, at least in the short run. Only if the resulting change in the rate of interest alters a component of aggregate demand (for example, investment) will monetary policy affect short-run employment and real output. Then, via the Phillips curve, these employment and output effects can, over time, have an impact on the price level of goods and services. If bond price changes do not induce changes in some component of aggregate demand, monetary policy is ineffectual. This view is often categorised as ‘you can’t push on a string’.

Suggested Citation

  • Paul Davidson, 1993. "Monetary Theory and Policy in a Global Context with a Large International Debt," Palgrave Macmillan Books, in: Stephen F. Frowen (ed.), Monetary Theory and Monetary Policy, chapter 9, pages 225-258, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-23096-9_16
    DOI: 10.1007/978-1-349-23096-9_16
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