Money, Banks and Finance in Economic Thought

Has the 2008 financial crisis finally promoted the analysis of a monetary economics?

Sau Lino, Department of economics and statistics, University of Torino (Turin)

ABSTRACT: The financial crisis, stemmed on 2008 in US and not yet coming to the end, has opened a relevant debate on the need to study the behaviour of a monetary economy in line with Keynes’s original insights (see for instance: Chick, 2013; Stiglitz, 2015). Mainstream approaches (i.e. Dynamic Stochastic General Equilibrium Models, DSGE) focused indeed on the representative agent models make them particularly unsuitable for the analysis of a financial crisis. Financial markets are largely irrelevant. After all, who is lending to whom? The nature of the financial instruments (debt/equity/bonds) is then irrelevant. Thus, by construction, these theories have little to say about financial instability and crisis. Even if some mainstream economist like Blanchard (2013) has tried to include the financial sector in the analysis, one aspect has proved particularly problematic -i.e the provision of credit- indeed it has been totally neglected. Furthermore, traditional monetary economics has focused on money, but what was really important in determining aggregate behavior is credit. Again, the traditional argument that the role of banking as intermediating between savers and investors is simply misleading. A credit economy is based on trust, and in particular, trust that the money that is borrowed will be repaid; and trust that the money that is received will be honored by others. In this paper I point out that we need to go back to Keynes’s original insights to understand a true “monetary economy”. He has argued indeed that the spread of fiat money (i.e the money that the government has declared to be legal which is not backed by a physical commodity and that is created by the credit market) has profoundly changed the characteristics and the stability of the economic system. The paper will stress the need to overcome the mainstream approach because it has led to the consideration of financial structure as a neutral instrument only that does not affect the evolution of the economy.

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Keywords: Money, Credit, Banking, Crisis

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