Inflation and Unemployment: Contributions to a New Macroeconomic Approach

Inflation and Unemployment: Contributions to a New Macroeconomic Approach

Inflation and Unemployment: Contributions to a New Macroeconomic Approach

Inflation and Unemployment: Contributions to a New Macroeconomic Approach

Synopsis

Are inflation and unemployment inevitable? This work challenges traditional monetary theory by focusing on the role of banks, and provides a new insight into the role played by bank money and capital accumulation.

Excerpt

Alvaro Cencini and Mauro Baranzini

Despite some modest signs of recovery, it can hardly be denied that unemployment is an increasingly worrying symptom of the disorderly workings of our economic systems. Moreover, inflation is still far from being defeated and never stops asserting its close relationship with deflation. In such a context the need for a better understanding of stagflation is evident. This is not to deny, of course, the importance of the contributions economists have been providing since the seminal works of Ricardo on monetary economics. However, the coexistence of two apparently complementary disequilibria such as inflation and deflation is still a mystery, and very little progress has been made towards explaining the nature of their relationship. Phillips' claim that inflation and unemployment are inversely correlated has never been effectively established, and the debate which arose after the publication of his famous article in Economica (1958) did not provide a solution to the problem. The very analysis of inflation is in itself not entirely satisfactory. The brilliant intuitions of Ricardo and Keynes have not been followed up by a thorough investigation into the monetary causes of this disequilibrium, which remains partially unexplained. The concept of excess demand and the idea that inflation is provoked by an anomalous increase in the money supply have not been followed to their extreme implications and there is still a lot of confusion about the role played by banks in the process of money creation.

Generally speaking, it is usually claimed that inflation is the consequence of the behaviour of economic agents. Dishoarding, credit expansion, public expenditure, wage increases, devaluation and rises in foreign prices are successively put on trial and condemned according to the prevailing beliefs of the moment. Yet, it is not at all clear why an increase in consumption can lead to inflation given that what is saved is necessarily spent through the intermediation of the banks in which savings are deposited. The equality between saving and investment is a consequence of the banking nature of modern money, and not a matter of adjustment. Analogously, how can the identity between total demand and total supply be invalidated without betraying the laws of bank money? These are difficult questions which

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