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A Study in Monetary Macroeconomics$
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Stefan Homburg

Print publication date: 2017

Print ISBN-13: 9780198807537

Published to Oxford Scholarship Online: August 2017

DOI: 10.1093/oso/9780198807537.001.0001

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(p.7) Chapter 2 Framework
A Study in Monetary Macroeconomics

Stefan Homburg

Oxford University Press

Chapter 2 sets out the basic framework. It considers an economy evolving indefinitely in discrete time, with producers, consumers, and a central bank as principal actors. Individuals plan over finite horizons and form expectations according to what they see. Money is conceived of as a commodity that is produced through credit creation rather than distributed by a fancy helicopter. This natural way to represent money is rarely followed in the literature and differs sharply from the usual helicopter drops because it ties money creation to credit creation. The chapter’s upshot is a system of simultaneous equations determining prices, wages, and the nominal interest rate. Using this solution, individuals revise their expectations, and the economy proceeds to the next period. The chapter concludes with functional and numerical specifications for later simulations, the purpose of which is to analyze key economic processes and to derive meaningful results.

Keywords:   basic framework, central bank, credit creation, money creation, nominal interest rate, wages, consumers, producers

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