A Meta-Theory Of Money/Macro

I hope the contents of this post live up to the intellectual pretension of a term like ‘meta-theory’. You be the judge.

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During the interwar period, John Maynard Keynes wrote three books on money/macro:

1.  A Tract on Monetary Reform (1923)
2. A Treatise on Money (1930)
3. The General Theory of Employment, Interest and Money (1936)

The first book was written in the early 1920s, in the midst of highly unstable price levels in many countries, notably Germany. The second was mostly written at the end of the 1920s, a period of relative stability. The third was written in the midst of the Great Depression, when interest rates were close to zero. A lot happened in that relatively brief 13-year period.

Each book clearly reflects the period in which it was written.  The Tract is basically a monetarist book, focusing on how printing lots of money can lead to high inflation.  It covers the Quantity Theory of Money, as well as related concepts such as the inflation tax, purchasing power parity, and the interest parity condition.  These are the issues that economists focus on when inflation is very high and/or unstable.

The Treatise is probably best thought of as a sort of “New Keynesian” book.  Not literally—Keynes doesn’t assume rational expectations or develop DSGE models of the economy—rather in spirit.  He suggests that the central bank can and should stabilize the price level (not much different from the NK 2% inflation target.)  He suggests that monetary policy is generally enough, but one could conceive of an extreme case when fiscal actions would be needed.  He talks about forward guidance as an additional policy tool, a promise to hold interest rates low for an extended period.  It’s very moderate book, which seems compatible with the consensus view of monetary policy during the 1990s and early 2000s.  While the Tract also advocated price stability, in the Treatise there is clearly a move away from the quantity theory and toward a focus on interest rates as the instrument of monetary policy.

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