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Does The Stock of Money Have Any Causal Significance

  • Philip Arestis
  • Malcolm Sawyer

Recent developments in macroeconomics, and in economic policy in general, have produced a "new consensus" economy-wide model, in which the stock of money does not play any causal role, but operates as a mere residual in the economic process. The absence of the stock of money in many current debates over monetary policy has prompted the deputy governor of the Bank of England to note the irony of the situation: as central banks became more and more concerned with price stability, less and less attention is paid to money. Indeed in several countries, the decline of interest in money appears to have coincided with low inflation. In turn, a number of contributions have attempted, wittingly or unwittingly, to "reinstate" a more substantial role for money in this "new" macroeconomics. In this paper we argue that these attempts to "reinstate" money in current macroeconomic thinking entail two important problems. First, they contradict an important theoretical property of the new "consensus" macroeconomic model, namely, that of dichotomy between the monetary and the real sector. Second, some of these attempts either fail in terms of their objective or merely reintroduce the problem rather than solve it. We conclude that if money is to be given a causal role in the "new" consensus model, more substantial research is needed.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_363.

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Date of creation: Dec 2002
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Handle: RePEc:lev:wrkpap:wp_363
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  1. Philip Arestis & Malcolm Sawyer, 2002. "The Bank of England Macroeconomic Model: Its Nature and Implications," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(4), pages 529-545, July.
  2. Philip Arestis & Malcolm Sawyer, 2002. "Can Monetary Policy Affect The Real Economy?," Macroeconomics 0209012, EconWPA.
  3. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
  4. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
  5. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
  6. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers 99-5, Bank of Canada.
  7. Philip Arestis & Malcolm Sawyer, 2003. "The Nature and Role of Monetary Policy When Money Is Endogenous," Economics Working Paper Archive wp_374, Levy Economics Institute.
  8. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  9. David Romer, 2000. "Keynesian Macroeconomics without the LM Curve," NBER Working Papers 7461, National Bureau of Economic Research, Inc.
  10. Cottrell, Allin, 1994. "Post-Keynesian Monetary Economics," Cambridge Journal of Economics, Oxford University Press, vol. 18(6), pages 587-605, December.
  11. Scott Hendry, 1995. "Long-Run Demand for M1," Macroeconomics 9511001, EconWPA.
  12. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  14. Heinz-Peter Spahn, 2001. "On the theory of interest rate policy," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 355-380.
  15. Arestis, Philip & Howells, Peter, 1996. "Theoretical Reflections on Endogenous Money: The Problem with 'Convenience Lending.'," Cambridge Journal of Economics, Oxford University Press, vol. 20(5), pages 539-51, September.
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  17. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
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