Monetary Policy within the IS-LM Framework

Chapter 5

Keynes’ View of Monetary Policy

Without doubt, the existence of a central bank is the most prominent symbol of the importance of monetary policy. The first central banks, Riksbank of Sweden, established in 1668 and the Bank of England that opened its doors in 1694, were privately owned and created to lend money to the government. In modern economies central banks are the ultimate monetary authority of their respective governments. Although the concept of a ­government-­operated central bank with legislative authority to regulate the banking system, monetary system, monetary policy, and currency is well established now, that was not the case in the early 20th century. A misconception about Keynes is that he advocates the use of fiscal ...