Charles A E. Goodhart

The continuing muddles of monetary theory: A steadfast refusal to face facts

19 pages · 4.64 EUR
(September 2009)

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“The continuing muddles of monetary theory: A steadfast refusal to face facts” are addressed by Charles A.E. Goodhart. He holds that there has been a remarkable gulf between mainstream monetary theory and reality in recent decades. Amongst the worst examples are: (1) the IS/LM-model, assuming that the monetary authorities set the monetary base, and the interest rate is determined in the market; (2) the monetary base multiplier of bank deposits, and the role of reserve ratios; (3) the current three equation neo-classical consensus, which not only assumes perfect creditworthiness for all agents, but also an essentially nonmonetary system, e.g. no need for banks; and (4) the standard theory of the evolution of money. Monetary economics can only get better, but it has a long way yet to go, Goodhart concludes.