Theory of money and finance

This book sets out to develop the basic monetary theory required for undergraduate courses in monetary and macro economics, including a discussion of the concept of money, the various possible definitions of money and the need to distinguish between them. At the same time it provides an introduction to flow-of-funds accounting, and describes the operation and significance of financial markets and institutions. The book concludes by examining the process of money-supply creation in detail, dealing first with the standard money-multiplier approach and the criticisms that have been raised against it, and then proposing an original and more realistic theory in its place.

Throughout, importance is attached to practical application of the theory in order to help the reader to relate their theoretical knowledge to recent empirical work and existing institutions. The final chapter, in which the author develops a novel theory of the money-supply process, is particularly significant. The argument is developed in terms of the lending activities of the banks to explain the process of money creation, and provides a dynamic disequilibrium framework which justifies a direct effect of money on the rest of the economy.