Monetary Theory: Interest, Inflation and Growth in the World Economy
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This is an e-book,
not a printed book.
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In this volume, Mundell regrouped his ideas and writings on monetary theory, as they have matured over the sixties. What he proposed then, were fundamental innovations needed to bring monetary theory closer to the real world observation, and the recognition of the interdependence of regions or nations in a world economy.
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Introduction to the 1971 edition:
Keynes' General Theory was written in the 1930s. Its premises reflect the uncertainties of that decade. Keynes assumed rigid wages, no growth, a closed economy, and exogenous expectations. The Keynesian model is a short run model of a closed economy, dominated by pessimistic expectations and rigid wages. This model is not relevant to modern economies.
Keynes was acutely aware of the importance of expectations in linking the present and future. He rejected the notion that expectations could be embodied in any mechanical hypothesis relating the present and future. Ironically, this agnostic attitude, attributable to the importance he attached to the role of expectations, was transmogrified in the mathematized versions of the Keynesian model into the most mechanical and naive of all expectations hypotheses: that the future will be like the present. In a world conditioned to progress this amounts to a very pessimistic view of the future.
From 1940 to the present the world economy experienced the greatest sustained period of growth in history, creating an economic environment and a psychological orientation exactly opposite to that in which Keynes wrote. This environmental change has rendered the expectations premises of the General Theory obsolete. The stagnation pessimism orientation of the closed Keynesian depression model cannot be sustained in a growing world economy experiencing secular inflation and rapid growth.
There is, however, a lack of alternatives to the Keynesian system in the literature.
This book attempts to provide one. Its basic conception is a growing world economy composed of interacting national economies. It takes the eighteenth century Human conception of an interdependent world monetary system and incorporates into it Keynes' analytical developments, modifying his premises and synthesizing his results with the modern theory of economic growth. Its primary aim is to find an inflationary complement to the Keynesian depression model. Keynes' theory attempts to explain unemployment equilibrium; this book focuses on inflationary equilibrium. The two models come together at full employment and stable prices. Except at this boundary case, the premises of the two models are different.
In place of the Keynesian expectations assumptions this book assumes that if spot prices rise they will maintain their new level or, in an inflationary environment, go on rising. In states of rapid inflation or hyperinflation, expected inflation rates may even accelerate. Growth and the balance of payments are also explicitly introduced into the analysis. The only closed economy is the world economy.
The ideas developed in this book matured at different stages back in the 1950s and 1960s, and some of them are part of the literature of the period. The first half of the book presents the analytical infrastructure underlying the world system presented in the second half. The object is to combine the essential features of the specific models of Hume, Fisher, and Keynes in a more general theory of interest, inflation, and growth of the world economy. I do not claim to have resolved all the problems associated with a new approach, but only to have helped build, with able predecessors and contemporaries, a better foundation for modern monetary theory.
Robert A. Mundell
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