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Neoclassical Inflation: No theory there

John Weeks

Discussion Papers from Research on Money and Finance

Abstract: The theoretical generalization that the price level is determined by the quantity of money is commonly employed as a teaching device, in abstract modeling, and as a guide to policy. It represents a profound misunderstanding of inflation. In specific, the famous parable, more money then more inflation, is logically wrong. Far from the strength of neoclassical economics, its theory of inflation encapsulates and epitomizes its most fatal analytical errors and contradictions. Prominent among these errors and contradictions are the failure to provide a convincing explanation for the existence of money, and the closely related inability to provide a definition of money that makes its supply analytically determinate. These basic problems require the creation of an imaginary economy, the analysis of which results in arbitrary conclusions that cannot be generalized beyond neoclassical Cloud-Cuckoo Land.

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