Money, Prices and Output

Abstract

Money, Prices and Output: An Integrative Essay

This essay aims to put some recent developments in monetary economics into perspective by drawing out what we have learnt - or relearnt - from them about the structure of the economic system. Following a very brief historical overview the methodology of much recent analysis is illustrated by presenting a very simple one good, one asset model designed to illuminate one or two important relationships. The way in which the simple model provides suggestions about relationships in larger, more complicated, and presumably more realistic models is shown. The basic insights about the role of money in the economic system given by this class of model have been tested, and appear to be quite robust. Rigorous testing of economic theory of the sort discussed is a time consuming and expensive business, however, and the essay discusses an alternative way in which the basic insights of modern monetary theory can be applied. The two good one asset model used in quite a bit of recent theoretical writing is introduced, and used to analyze an important policy problem, the shifting trade-off between inflation and unemployment.