[This paper considers two questions: (i) what is the purpose of legal restrictions intended to separate "money" from "credit markets," and (ii) is such a separation desirable? It is argued that historical legal restrictions meant to achieve such a separation were designed to preclude the occurrence of sunspot equilibria. It is also shown that a coherent model can be constructed in which sunspot equilibria exist in the absence of legal restrictions, but not if money and credit markets are separated. Nevertheless, there is no obvious welfare justification for such a separation.]

This paper considers two questions: (i) what is the purpose of legal restrictions intended to separate "money" from "credit markets," and (ii) is such a separation desirable? It is argued that historical legal restrictions meant to achieve such a separation were designed to preclude the occurrence of sunspot equilibria. It is also shown that a coherent model can be constructed in which sunspot equilibria exist in the absence of legal restrictions, but not if money and credit markets are separated. Nevertheless, there is no obvious welfare justification for such a separation.

Recent developments in monetary economics stress the nature of monetary injections, emphasizing that they have implications for the relationship between money and prices. In contrast, traditional approaches posit stable money demand functions that are independent of how money is injected. The former approach implies that certain proportionality relations between money and prices need not obtain. This permits the two approaches to be empirically distinguished, but only if an appropriate "experiment" is conducted. The colonial period is one such experiment. Colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply.

Economic development is typically accompanied by migration from rural to urban employment. This migration is often associated with significant urban underemployment. Both factors are important in the development process. We consider a neoclassical growth model with rural‐urban migration and urban underemployment, which arises from an adverse selection problem in labor markets. We demonstrate that rural‐urban migration and underemployment can be a source of development traps and can give rise to a large set of periodic equilibria display long periods of uninterrupted growth, punctuated by brief but severe recessions.