How to Model “Money” in Economics


Article worth reading. One comment I would make is that Murphy does not consider the most difficult policy hurdle in defining money in the first place. The shadow-banking system “creates” money by creating credit. This is what the Fed could not manage. Now it struggles to manage the contraction of that “money” as everyone de-leverages their debt.

Robert P. Murphy. “Modeling Money.” June 4, 2012. Library of Economics and Liberty [Online] available from http://www.econlib.org/library/Columns/y2012/Murphymoney.html; accessed 4 June 2012; Internet.

Murphy points out that even at this late stage in economic thought, economists fit money in their model rather awkwardly. He considers the pros and cons of two ways of “modeling” money.

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