The relevance of money for economic development

Abstract

Why are macroeconomic considerations, in particular those about money and currencies, relevant for economic policy if the overall goal of governments is welfare for the majority of the population? Broadly speaking, economic theory offers two but contradicting views on whether and how money essentially affects economic development: In the neoclassical paradigm money is understood purely as a medium of exchange that enables transactions in the real economic sphere but is neutral to economic development. In this view, the real economy, including investment, production and employment, is not much affected by monetary policy decisions. In the neoclassical approach, investment is the direct result of the propensity to save and the influence of policies on the decision of private households to save or to consume is rather small. Prize stabilization is needed to avoid distortions in the optimal allocation of resources.