MAJOR ISSUES IN MONETARY ECONOMICS

Abstract

THE purpose of this paper is to survey the major issues in monetary economics, with a view to discerning the most fruitful lines of future theoretical and empirical research. This is a useful point in time at which to undertake such a survey, for both a negative and a positive reason. The negative reason is that the upsurge of the monetarist counter-revolution, which began some years ago in the United States on the basis of the proven failure of Keynesian fiscal policy to control inflation, and which promised to revitalize the whole field of monetary economics in this and other countries previously dominated by Keynesianism, has subsided into disarray due to the failure of monetarism, as understood by the public, to deliver policies effective in controlling inflation effectively and without prolonged and relatively large-scale unemployment. (It should be noted that the leading monetarists never promised such easy success, but the public nevertheless was led to expect it; meanwhile, 'monetarism' has learned from the experience a great deal about the importance of priceexpectations, lags, and micro-economic market functioning, while 'Keynesianism' has largely retreated into a desperate appeal for rescue to the sociologists and a reiteration of the need for an incomes policy-despite its historically amply proven futility-to control the key monetary variable that is left undetermined in the Keynesian model.) The positive reason is the arrival of a new generation of monetary economists, come too lately and from too diverse origins to be partisans of rather than learners from the Keynesian revolution and the monetarist counter-revolution, and equipped with requisite mathematical and statistical tools to forward the scientific evolution of monetary economics. There is therefore a challenge to be met, and a scientifically useful response possible. But there are dangers that the opportunity will be wasted by distraction of effort to activities of peripheral scientific value. Apart from the fact that the collapse of the established international monetary system over the past two years has tended to concentrate attention on the short-run policy problems of international crisis, there are three major reasons for concern about the present state of monetary economics. First, there is a noticeable tendency for the relics of the Keynesian revolution and their contemporary disciples to attempt to force anyone seriously interested in the influence of money and of monetary policy into the mould of the largely fictitious 'classical orthodoxy' against which the Keynesian