Introduction

Abstract

The central emphasis in the book is on the transaction and the constraints that its architecture imposes on a discussion of monetary theory and policy. Because of their comprehensiveness and discipline the flow-of-funds accounts are the ideal vehicle for theorizing about real and financial interaction. Such interaction can best be understood when real and financial transactions are expressed in a common flow dimension. Each decision by economic agents is seen as two-ended in terms of markets: one market supplies the source of funds and the second market absorbs these funds. A matrix of interdependent markets is featured throughout the theoretical discussion. Credit markets, and the bank credit market in particular, become the source of disturbance in the theoretical model, but the necessary involvement of the money market is also stressed. Theories of financial instability and crisis now receiving considerable attention are part of the more general theory of the flow of funds. The rationale for the monetary authority to target credit rather than the monetary aggregates emerges from the analytical discussion.