Monetary Theory and Policy in a Global Context with a Large International Debt

  • Paul Davidson


Neoclassical monetary theory is divided on the role of monetary policy in the real world. Under the traditional monetarist approach, changes in the quantity of money directly affect the price level of all goods without any long-run effects on employment and output. Under the orthodox neoclassical synthesis Keynesian approach, on the other hand, monetary policy directly, and only, affects the price of bonds, at least in the short run. Only if the resulting change in the rate of interest alters a component of aggregate demand (for example, investment) will monetary policy affect short-run employment and real output. Then, via the Phillips curve, these employment and output effects can, over time, have an impact on the price level of goods and services. If bond price changes do not induce changes in some component of aggregate demand, monetary policy is ineffectual. This view is often categorised as ‘you can’t push on a string’.


Exchange Rate Monetary Policy Real Wage Trade Deficit Export Earning 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Brothwell, J. F. (1983) ‘Wages and Employment: A Reply to Maynard and Rose’, Journal of Post Kevnesian Economics, vol. 6, no. 1, pp. 101–104.Google Scholar
  2. Davidson, P. (1982) International Money and the Real World (London: Macmillan)Google Scholar
  3. Davidson, P. (1983) ‘The Marginal Product Curve is not the Demand Curve for Labor and Lucas’s Labor Supply Function is not the Supply Curve for Labor in the Real World’, Journal of Post Keynesian Economics, vol. 6, no. 1, pp. 105–117.Google Scholar
  4. Davidson, P. and E. Smolensky (1964) Aggregate Supply and Demand Analysis (New York: Harper & Row).Google Scholar
  5. Friedman, M. (1974) ‘A Theoretical Framework for Monetary Analysis’, in R. J. Gordon (ed.), Milton Friedman’s Monetary Framework: A Debate with His Critics, (Chicago: University of Chicago Press).Google Scholar
  6. Hicks, J. R. (1939) Value and Capital, 2nd edn (Oxford: Clarendon Press).Google Scholar
  7. Keynes, J. M. (1973) The Collected Writings of John Maynard Keynes, vol. 13 (London: Macmillan).Google Scholar
  8. Keynes, J. M. (1980) The Collected Writings of John Maynard Keynes, vol. 25 (London: Macmillan).CrossRefGoogle Scholar
  9. Keynes, J. M. (1936) The General Theory of Employment, Interest and Money (London: Macmillan).Google Scholar

Copyright information

© Stephen F. Frowen 1993

Authors and Affiliations

  • Paul Davidson

There are no affiliations available

Personalised recommendations