ABSTRACT

This chapter discusses that a large part of contemporary economic theory has laid undue stress on "real" factors and that "monetary" factors and the closely related phenomena of institutional price and wage rigidities have been neglected or their importance grossly underestimated. The chapter explains first what author means by instability. The author defines it as fluctuations in aggregate output and employment. However, even with stable aggregate output and employment, price instability is possible in the sense of changes in relative prices as well as of the price level. One of the most striking and revealing characteristics of the short cycle is that the ups and downs in output and employment are closely correlated with ups and downs in price levels. The chapter concludes that Monetary factors comprehensively defined bear a heavy share of responsibility for short run economic instability—for the ordinary business cycle as well as for the instability and chronic disequilibria in the balances of payments.