Monetary theory and policy : the debate revisited

Abstract

This paper is aimed at revisiting monetary analysis in order to better understand erroneouschoices in the conduct of monetary policy. According to the prevailing consensus, the marketeconomy is intrinsically stable and is upset only by poor behaviour by government or the bankingsystem. We maintain on the contrary that the economy is unstable and that achieving stabilityrequires a discretionary economic policy. This position relies upon an analytical approach in whichmonetary and financial organisations are devices that help markets to function. In thisperspective, which focuses on the heterogeneity of markets and agents, and, consequently, onthe role of institutions in determining overall performance, it turns out that nominal rigidities andfinancial commitment offer the means to achieve economic stability. This is because they preventsuccessive, unavoidable disequilibria from becoming explosive.