Friday 30 November 2018

The Natural Rate of Interest (5)

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One of Keynes’s central tenets is that there is no strong automatic tendency for economies to move towards full employment levels. 
Money doesn’t matter in mainstream macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system. 
But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run: 
"The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy." 
J. M. Keynes A monetary theory of production (1933)

See also (1) Neutrality of Money — Definition and Refutation
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