ABSTRACT
This chapter discusses the role of monetary policy. Keynes offered an explanation for the presumed impotence of monetary policy to stem the depression, a nonmonetary interpretation of the depression, and an alternative to monetary policy for meeting the depression. The theoretical developments did not undermine Keynes' argument against the potency of orthodox monetary measures when liquidity preference is absolute, since under such circumstances the usual monetary operations involve simply substituting money for other assets without changing total wealth. Monetary growth, it is widely held, will tend to stimulate employment; monetary contraction, to retard employment. The chapter also discusses two limitations of monetary policy: It cannot peg interest rates for more than very limited periods and it cannot peg the rate of unemployment for more than very limited periods. The limitation derives from a much misunderstood feature of the relation between money and interest rates.
