This monograph is the outgrowth of ideas developed while we were colleagues at Brown University from 1968 to 1971. During that period, we became aware that we shared similar reservations about the weak foundations of conventional macro-economic analysis. We both felt the need for a substantial restructuring of these foundations, especially to deal adequately with the problem of exchange under non-market clearing conditions. Unfortunately, earlier efforts by other authors, especially Patinkin (1956, chapter 13) and Clower (1965), along lines which seemed promising had apparently made little impact on the profession. However, the publication of the argumentative book by Leijonhufvud (1968) did succeed in stimulating interest in these issues.

Our first joint paper dealing with the reformulation of macro-economic analysis built on the foundations suggested by the work of Patinkin and Clower and was published in the American Economic Review in 1971. The ideas in this paper provide the basis for the analytical core of the present monograph. The present work also makes use of ideas developed in our subsequent individual and joint papers which are listed in the references at the end of the book.

Although the principal motivation for this monograph is to recast macro-economic analysis in terms of a theory of exchange under non-market clearing conditions, we have also tried to incorporate into the analysis other recent and important contributions to the reformulation of macro-economic theory. We discuss in detail the role of inflationary expectations, especially their relation to interest rates and unemployment.