Macroeconomic Foundations of Macroeconomics (Routledge by Alvaro Cencini

By Alvaro Cencini

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A rigorous analysis of the way money is issued by banks and associated to physical output through production shows, in fact, that Friedman’s microeconomic conception of money and of the way it interacts with the real world is highly unrealistic and misleading. By defining money as a positive asset, Friedman misses the distinction between money and income and fails to grasp the monetary nature of economic production. It thus follows that the price stability advocated by Friedman is neither a necessary nor a desirable requirement of economic growth.

Firmly built on Keynes’s identity between macroeconomic saving and investment, the analysis of fixed capital is a necessary step towards the understanding of interest. Wrongly conceived of as the price of money or as the price equilibrating supply of and demand for liquidity, interest would still remain an arbitrary magnitude if it were not related to capital accumulation. In fact, even the existence of a positive interest on consumption loans would be difficult to justify if it were not backed by a positive interest derived from macroeconomic investment (saving).

Every attempt at taming erratic exchange rate fluctuations without modifying today’s system of international payments has therefore a cost. Alternatives range from foreign exchange market interventions and interest rate policies to the loss of monetary sovereignty. A price has to be paid even when full exchange rate stability is obtained by the most radical solution: monetary unification. In the case of the European Union, for example, since national currencies no longer exist, no interventions are needed any longer within the euro area.

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