Monetary economics

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Monetary economics is a branch of economics that provides a framework for analyzing money in its functions as a medium of exchange, store of value, and unit of account. It considers how money, for example fiat currency, can gain acceptance purely because of its convenience as a public good.^[1] It examines the effects of monetary systems, including regulation of money and associated financial institutions^[2] and international aspects.^[3]

The discipline has historically prefigured, and remains integrally linked to, macroeconomics.^[4] Modern analysis has attempted to provide microfoundations for the demand for money^[5] and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand for output.^[6] Its methods include deriving and testing the implications of money as a substitute for other assets^[7] and as based on explicit frictions.^[8]

History

Serious interest in the concepts behind money occurred during the dramatic period of inflation known as the Price Revolution, during which the value of gold fell precipitously, sometimes fluctuating wildly, because of the importation of gold from the New World, primarily by Spain.

At the end of this period, the first modern texts on monetary economics were beginning to appear.

In 1705, John Law in Scotland published Money and Trade, which examined the failure of metal-based money during the previous 150 years, and proposed replacing it with a land bank system of paper money based on the value of real estate. Though he succeeded in getting this proposal implemented, he failed to take the lessons of the Spanish Price Revolution seriously enough, and his bank failed, a bubble of speculation collapsing into extreme inflation.

Then, in 1720, Isaac Gervaise wrote The System or Theory of the Trade of the World, blaming mercantilism and state-supported credit for the inflation problems of his era, doing so in a careful, scientific way that is still respected in the 21st century.

Della Moneta, was published by Ferdinando Galiani in 1751, and is arguably the first modern text on economic theory. This was 25 years before Adam Smith's more famous book, The Wealth of Nations, the latter of which touched on some of the same topics.

Della Moneta covered all major modern monetary concepts, including the value, origin, and regulation of money. Presumably because of the previous period of unreliable monetary value, he carefully examined the possible causes for money's value to fluctuate.

During this same century, the concept of bank notes became more common in Europe. David Hume referred to it as "this new invention of paper".^[9] In his own book published the year following Galiani's, Of the Balance of Trade, Hume argues that one need not worry about the import or export of goods creating a surplus or shortage of either money or goods, because an excess or shortage of money will always increase or decrease demand, until equilibrium is reached. In modern economic terms, this is as equilibration through the price-specie flow mechanism.

Research areas

Traditionally, research areas in monetary economics have included:

• empirical determinants and measurement of the money supply, whether narrowly, broadly, or index-aggregated, in relation to economic activity^[10]
• debt-deflation and balance-sheet theories, which hypothesize that over-extension of credit associated with a subsequent asset-price fall generate business fluctuations through the wealth effect on net worth.^[11] and the relationship between the demand for output and the demand for money^[12]
• monetary implications of the asset-price/macroeconomic relation^[13]
• the quantity theory of money,^[14] monetarism,^[15] and the importance and stability of the relation between the money supply and interest rates, the price level, and nominal and real output of an economy.^[16]
• monetary impacts on interest rates and the term structure of interest rates^[17]
• lessons of monetary/financial history^[18]
• transmission mechanisms of monetary policy as to the macroeconomy^[19]
• the monetary/fiscal policy relationship to macroeconomic stability^[20]
• neutrality of money vs. money illusion as to a change in the money supply, price level, or inflation on output^[21]
• tests, testability, and implications of rational-expectations theory as to changes in output or inflation from monetary policy^[22]
• monetary implications of imperfect and asymmetric information^[23] and fraudulent finance^[24]
• game theory as a modeling paradigm for monetary and financial institutions^[25]
• the political economy of financial regulation and monetary policy^[26]
• possible advantages of following a monetary-policy rule to avoid inefficiencies of time inconsistency from discretionary policy^[27]
• "anything that central bankers should be interested in."^[28]

Current state

Since 1990, the classical form of monetarism has been questioned. This is because of events which many economists interpret as inexplicable in monetarist terms, especially the unhinging of the money supply growth from inflation in the 1990s and the failure of pure monetary policy to stimulate the economy in the 2001-2003 period. Alan Greenspan, former chairman of the Federal Reserve, argued that the 1990s decoupling may be explained by a virtuous cycle of productivity and investment on one hand, and a certain degree of "irrational exuberance" in the investment sector.

In 2011, Christopher Sims won the Nobel Prize.^[29] His paper,'Does Monetary Policy Generate Recessions' used an identified vector autoregression model to show that the elasticity of money demand is greater than zero. The implication of this result is that fiscal stimulus is effective and monetary contractions aren't the sole cause of recessions.^[30] This result conflicts with the monetarist findings of Milton Friedman.

See also

Notes

General references

• Handbook of Monetary Economics, Elsevier.

Friedman, Benjamin M., and Frank H. Hahn, ed. , 1990. v. 1 links for description & contents and chapter-outline previews

_____, 1990. v. 2 links for description & contents and chapter-outline previews.

Friedman, Benjamin, and Michael Woodford, 2010. v. 3A & 3B links for description & and chapter abstract & TOC.

• Boughton, James R., and Elmus R. Wicker, 1975. The Principles of Monetary Economics.
• Brunner, Karl, and Allan H. Meltzer, 1993. Money and the Economy: Issues in Monetary Analysis, Cambridge. Description and chapter previews, pp. ix-x.
• Clower, Robert W., ed., 1969. Monetary Theory: Selected Readings, Harmondsworth, Penguin.
• Eden, Benjamin, 2005. A Course in Monetary Economics: Sequential Trade, Money, and Uncertainty. Description.
• Gale, Douglas, 1982. Money: in Equilibrium, Cambridge University Press, Cambridge Economic H andbooks, 349 pp. ISBN 978-0-521-28900-9. Description and preview.
• _____, 1983. Money: in Disequilibrium, Cambridge Economic Handbooks, 382 pp. ISBN 978-0-521-26917-9. Description and preview.
• Goodhart, Charles, 1989. Money, Information and Uncertainty, 2nd Ed. MIT Press. Description and chapter titles.
• Grandmont, Jean-Michel, 1985. Money and Value: A Reconsideration of Classical and Neoclassical Monetary Economics, Econometric Society Monographs, v. 5, Cambridge University Press. ISBN 978-0-521-31364-3. Description and preview .
• Handa, Jagdish, 2007. Monetary Economics, 2nd ed. Routledge. Description and preview.
• Harris, Laurence, 1981. Monetary Theory. New York: McGraw-Hill.
• Hicks, John R., 1967. Critical Essays in Monetary Theory, Chapter preview links. Oxford.
• The New Palgrave Dictionary of Finance and Money, 1992. 3 v. Description.
• The New Palgrave Dictionary of Economics Online, 2008. Abstract links for "Monetary Economics" (alphabetical) and "monetary".
• Rabin, Alan A., 2004. Monetary Theory MPG Books: London. Arrow-page-searchable chapter previews.
• Starr, Ross M., ed. (1989). General equilibrium models of monetary economies: Studies in the static foundations of monetary theory. Economic theory, econometrics, and mathematical economics. Academic Press. p. 351. ISBN 978-0-12-663970-4. 
• Walsh, Carl E., 2003. Monetary Theory and Policy, 2nd ed., MIT Press. ISBN 0-262-23231-6. Description and chapter-preview links.
• Woodford, Michael (2003). Interest and prices: Foundations of a theory of monetary policy. Princeton, New Jersey: Princeton University Press. ISBN 0-691-01049-8. 

External links

• Journal of Money, Credit and Banking
• Journal of Monetary Economics
• NBER Working Papers: Links to JEL classes of abstracts or downloads for Macroeconomics and Monetary Economics, including:

(JEL: E4) Money and Interest Rates

(JEL: E5) Monetary Policy, Central Banking, and the Supply of Money and Credit

Presentation of Money, credit and finance an slideshow

What is money? an slideshow http://www.slideshare.net/MitchGreen/lesson-1-what-is-money#btnNext

[[Category:Macroeconomics and monetary economics}}