Economics
Monetary Theory
Monetary theory is a branch of economics that focuses on the role of money in the economy. It examines how changes in the money supply, interest rates, and central bank policies impact inflation, employment, and economic growth. The theory also explores the relationship between money, prices, and output, and how monetary policy can be used to stabilize the economy.
Written by Perlego with AI-assistance
Related key terms
1 of 5
11 Key excerpts on "Monetary Theory"
eBook - PDFMonetary Economics
Policy and its Theoretical Basis
- Keith Bain, Peter Howells(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
1 The meaning of money 1.1 Introduction 1.2 Functions and forms of money 1.3 Money in the aggregate 1.4 Formal definitions of money 1.5 Official measures of money 1.6 Summary 2 3 13 16 20 27 ‘We must have a good definition of Money, For if we do not, then what have we got, But a Quantity Theory of no-one-knows-what, And this would be almost too true to be funny.’ Kenneth Boulding, Journal of Money, Credit and Banking , Vol I, Aug 1969 p 555. 1.1 Introduction Monetary economics is the branch of economics dealing with money and mone-tary relationships in the economy. This is a broad definition which can include topics such as the reasons for the existence of money, the roles money performs in economic exchange, the transfer of wealth or models of economic growth. However, as the sub-title makes clear, this book is interested principally in mon-etary policy and hence on the macroeconomic aspects of monetary economics - on the links between money and the general level of prices, output, and employment both in the short- and long-term. Within this, monetary economists have been particularly concerned with the relationship between the rate of growth of the money supply and the rate of inflation and the question of the ‘neutrality’ of money — whether changes in the quantity of money in an economy have an impact on the ‘real’ values of output and employment or influence only the gen-eral level of prices. This has led to a great deal of theory but we should always recall that a major aim of monetary economics is to produce a better understanding of the operation and impact of monetary policy: what, if anything, governments and/or central banks can do to improve the way in which economies perform through the use of the instruments of monetary policy or, at least, to avoid damaging the perform-ance of the real economy. Monetary policy is now regarded as central to the welfare of households and the profitability of firms.
eBook - PDF- R. Leeson(Author)
- 2010(Publication Date)
- Palgrave Macmillan(Publisher)
It is more than the interest rate equilibrating the demand and supply of money (or loanable funds), or the tension between IS and LM. It is more than the interactions between the monetary policies of central bank and commercial banks, or between liquidity preference and expectations. And so on. Economists of the typical monetary persuasion self-define their field and them- selves in those terms. The problem with the Quantity Theory and with quantity theorists, therefore, is that the theory has been used to obfuscate and rule out of monetary economics most other important aspects of a money economy. The rea- son is simple and straightforward: monetary economists largely accept the market economy, its mindset, and its system of money and banking. They strongly tend to treat the existing monetary and banking regime as part of the natural order of things, as something to study in a scientific manner as if it were not a matter of politics and policy, and to do so in a way that envelops two motivations long held by economists: one, to serve as the cheerleaders for the market economic system and its institutional integuments and two, to study the economy and its institu- tions in such a way as not to invite feedback challenging the safe existence of eco- nomics in general and monetary economics in particular. The fact that criticism of various practices and structures is voiced by economists shows only exceptions and does not negate the conclusion. Conventional practice strongly tends to omit the monetary and banking sys- tem within which the typical monetary economists’ work is conducted. Monetary journals, treatises, and textbooks rarely even touch on the politics of money and banking and its financing, or on the nature and consequences of a pecuniary 196 Warren J. Samuels economy, or … (the classic work in economics is Mitchell, 1937; in sociology, Simmel, 1990; see also Poggi, 1993; Zelizer, 1994).
eBook - PDFThe Monetary Theory of Production
Tradition and Perspectives
- G. Fontana, R. Realfonzo, G. Fontana, R. Realfonzo(Authors)
- 2005(Publication Date)
- Palgrave Macmillan(Publisher)
Introduction: The Monetary Theory of Production Giuseppe Fontana and Riccardo Realfonzo Keynes's legacy On 10 October 1932 Keynes resumed the Michaelmas term at King's College in Cambridge with a new title for his lectures; namely, 'The Monetary Theory of Production'. At around that time, Keynes used the same title for a contribution to a Festschrift for Arthur Spiethoff (Keynes, 1933). In this short paper Keynes discusses the difference between a real-exchange economy and a monetary economy, the distinction being that in the latter, but not in the former, money plays an essential role in the determination of the aggregate level of output and employment. According to Keynes, the lack of understanding of this non-neutral role of money is at the root of many problems in economics. In particular, the failure of the economic discipline to provide satisfactory explanations and solutions to real world problems, such as economic crises, is due to the lack of a theory for a monetary economy; what Keynes termed a Monetary Theory of production (MTP): In my opinion the main reason why the problem of crises is unsolved, or at any rate why this theory is so unsatisfactory, is to be found in the lack of what might be termed a Monetary Theory of production. The distinction which is normally made between a barter economy and a monetary eco- nomy depends upon the employment of money as a convenient means of effecting excha:J?ges - as an instrument of great convenience, but transitory and neutral in its effect. It is regarded as a mere link between cloth and wheat ... It is not supposed to affect the essential nature of the transaction from being, in the minds of those making it, one between real things, or to modify the motives and decision of the parties to it. Money, that is to say, is employed, but is treated as being in some sense neutral . .. That, however, is not the distinction which I have in mind when I say that we lack a Monetary Theory of production.
eBook - PDF- Meghnad Desai(Author)
- 2013(Publication Date)
- Bloomsbury Academic(Publisher)
68 Quantity Theory to Monetarism which form the core of the revival of the quantity theory. These relate to the stability of the demand for money over the long run, the relatively greater stability of the money demand function compared to the con-sumption function and hence the larger the size of the money mulitplier compared to the fiscal multiplier, the long and variable lags in the short run between changes in money stock and changes in real income and prices, the independent nature of changes in money stock and its causal primacy vis-a-vis changes in income and prices, the limits to fine tuning due to the imprecision of lags, the desirability of a fixed money growth rule with no feedback mechanism. Considerable controversy has surrounded each of these points and a large body of economic research can be cited on either side of each question. For our present purpose, we need to note that much of what was being asserted was empirical rather than theoretical. Friedman did not have, as yet, a fully fledged theory of the ways in which money affected output and prices. The empirical regularity of the relationship between money and nominal income was only strong in the secular context, the cyclical relationship being blurred and hedged by qualifications about the feedback from income to money. Even if Friedman's empirical assertions were to be admitted as true (and they were not), critics could still say that this did not amount to an explanation of how money affected economic activity. In the ranking order used by academic economists (and, I suspect, by researchers in other sciences) a theoretical model ranks much higher than 'mere' empirical evidence. Where was 'the trans-mission mechanism'? Even from the point of view of a quantity theorist, the Friedman story was incomplete. The traditional basis for the support the quantity theory has received has been that excess money (debauched currency) causes inflation and attendant economic and political crises.
eBook - PDFMoney and Banking
Made Simple
- Ken Hoyle(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
It is therefore not the demand for and supply of 'loanable funds* which sets interest rates but the supply of and demand for money. 9. Whose work is this approach built upon? 9. That of J. M. Keynes. It is part of his re-statement of the theory of money. 10. Go over the page until you are quite sure of the answer to each question. Then try some of the written ques-tions in Appendix 1. 8 THE SIGNIFICANCE OF MONEY IN THE ECONOMY 8.1 Introduction In the simplest of terms, money functions as a medium of exchange, and in this respect it is of great significance to an economy, which without money would have to revert to some form of barter. However, in more recent times money has been credited with much greater significance than that of a mere agent of exchange. In particular the way in which the amount of money in circulation affects the level of economic activity has attracted a great deal of attention. By the level of economic activity we mean the size of the national income, its distribution amongst the population, and the movement of the price level by which it is valued. The two previous chapters have suggested that Monetary Theory is an area where significant disputes exist. Such a suggestion is continued in this chapter where attitudes polarise around three approaches, two of which are still fiercely contested. The other is discussed today only as a foundation for the other two. In chronological order these approaches are (a) the classical quan-tity theory of money, (b) Keynesian theory and (c) modern monetarism. 8.2 The Classical Quantity Theory Classical economists were impressed by the way in which 'real' factors influ-enced relative prices. These factors—the tastes of households, factor supplies and technology—were thought to operate regardless of the quantity of money. In this respect money only facilitated exchange, it was neutral.
eBook - PDF- Subrata Ghatak, José R. Sánchez-Fung(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
C H A P T E R ........................................................................................................................ The Keynesian and monetarist views on the importance of money 5 This chapter discusses the classical, Keynesian and ‘monetarist’ theories regarding the role of money in economic activity. In the classical theory, the role of money has been relegated to the background. It is argued that monetary forces do not affect the movements of the real variables – that is, output and employment – in the economy. In the Keynesian theory it is suggested that a change in the money supply may change the level of output via changes in interest rates. The ‘monetarist’ school, headed by Milton Friedman, contends that the classical rather than the Keynesian theory would be valid so long as money can affect real variables in the short run, but only nominal magnitudes in the long run. We shall first discuss the classical theory. 5.1 The classical view ..................................................................................... The classical theory of income and employment is usually built around Say’s law which states, ‘supply creates its own demand’. If this were true, the economy could never experience either unemployment or underconsumption. Since there would be no dearth of demand, total expenditure within an economy would always be adequate to match total production at a full employment level, given the profit motive (for something is needed to induce the output to be supplied). The classical argument can be stated in a simple way. Let us assume that there is a market for goods and services as well as for labour. Assume also a production function which states that, given the existing technology, a given output could be produced by a certain amount of labour, fixed capital and equipment. All prices and wages are flexible and they respond to the forces of demand and supply.
eBook - PDFMoney, Income and Time
A Quantum-Theoretical Approach
- Alvaro Cencini(Author)
- 2013(Publication Date)
- Bloomsbury Academic(Publisher)
Finally, since it is impossible to know the demand for money independently of the level of prices, the theory cannot explain the formation of prices, which, therefore, remain totally undetermined. The Quantity Theory of Money 153 Notes 1. This path was followed by most of the classical economists, even though in different ways which gave rise to the famous controversy between the Banking School and the Currency School (see Ch. 3). Chapter Eleven The Monetarists' Attempt at Generalization 1. The attempt to integrate Keynes's analysis 1.1. Friedman's theory of nominal income Following his belief that monetarist and neo-Keynesian theories mainly differ in their choice of which key factors determine short-run economic change, Friedman introduces his theory as an alternative way of solving a system of equations which is fundamentally the same for both monetarists and Keynesians: The six equations would be accepted alike by adherents of the quantity theory and of the income-expenditure theory. On this level of abstraction, there is no difference between them' (in Gordon 1974: 31). The six equations to which Friedman is referring are the following: The first three equations describe the traditional neo-Keynesian model of income determination, whereas the other three define the monetarist approach to monetary analysis. By accepting these equations as his theoretical starting point, Friedman is clearly trying to incor-porate Keynes's analysis into a broader framework capable of accounting The Monetarists' Attempt at Generalization 1 55 both for Fisher's and Keynes's theories as particular cases. This becomes obvious as soon as Friedman introduces the alternative ways of providing the system with the 'missing equation' (p. 31). Of the three approaches it offers us, two define the traditional 'Fisherian' quantity theory and the Keynesian (or income-expenditure) theory respectively, and the last his own restated version of monetarism.
eBook - PDF- Sidney Weintraub(Author)
- 2016(Publication Date)
1 5 An Economics of Keynes'' Perspective on Money* HYMAN P. MINSKY Introduction Through the 1960s, and into the early 1970s, a monetarist counter-revolution swept through maeroeconomic theory in the United States. Monetarism is a version of the quantity theory of money, an adaptation which differs from the older forms in that it explicitly substitutes the stability of a demand function for money for the stability of the veloc-ity parameter implicit in the older formulations of the quantity theory. 1 In truth, monetarism is based upon errors of understanding as to what neoclassical theory proves and on errors of specification about the institutional characteristics of the economy in which we happen to live. 2 The transitory success that monetarism achieved among politi-*The title, distinguishing between the Economics of Keynes and Keynesian eco-nomics, is due to Axel Leijonhufvud. Despite differences I owe much to my colleagues in dissent from conventional wisdom: Paul Davidson, Sidney Weintraub, Victoria Chick, Jan Kregal, Robert Clower, and Axel Leijonhufvud, among Americans, and Joan Robinson, Lord Kahn, and Lord Kaldor in England. 'Milton Friedman, The Quantity Theory of Money—A Restatement, in Studies in the Quantity Theory of Money, ed. M. Friedman (Chicago: University of Chicago Press, 1956). 2 Frank Hahn, in his review [Economica 38, no. 149 (February 1971): 62-80] of Milton Friedman's book The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing, 1969) is quite explicit on the lack of understanding of general equilibrium theory that permeates Friedman's work. 295 296 HYMAN P. MINSKY cians, pundits, and central bankers was mainly because the standard macroeconomic monetary analysis was superficial and error-ridden, not because of the logical or empirical case made for monetarism.
eBook - PDFMonetary Economics
Theories, Evidence and Policy
- David G. Pierce, Peter J. Tysome(Authors)
- 2014(Publication Date)
- Butterworth-Heinemann(Publisher)
A review of the empirical evidence relating to the role of money and the effectiveness of monetary policy In Chapter 3 we surveyed the resuhs of empirical studies of the demand for money, and in this chapter we shall be reviewing the empirical evidence that has accumulated over the last two and a half decades on the role of money and the effectiveness of monetary policy in influencing key macroeconomic variables. There is, of course, a number of different ways of classifying these studies, but we shall find it useful to use a fourfold classification based on the major issue with which the 'pioneering' study(s) in a particular category was concerned. We shall consider the four categories in the order in which the pioneering studies took place. First of all we shall consider the evidence from studies that have attempted to measure the length and variability of the time lag associated with the influence of monetary variables on economic activity. Secondly we shall look at those studies which have attempted to assess the relative importance of money and autonomous expenditure variables in the determination of consumption expenditure and other macrovariables. These studies were originally seen as 'races' between the simple 'Keynesian' expenditure multiplier model and the Quantity Theory. The third category embraces those studies that have attempted to assess the relative effectiveness of fiscal and monetary policies in influencing the level of economic activity. Fourthly there are studies that have attempted to consider the question of causality in the association between money and other macroeconomic variables. The categories are not mutually exclusive and several studies belong to more than one of them. Broadly speaking, the role of money in the macroeconomy may be evaluated by using two kinds of 'model'. On the one hand there are the large structural models of the economy.
eBook - PDFReforms in China's Monetary Policy
A Frontbencher's Perspective
- Sun Guofeng(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
CHAPTER 1 Monetary Theory A Brief Discussion of the Ideological Roots of Conventional Money Theory 1 In conventional money theory, it is difficult to explain money creation and banking operations both in terms of logic and practice. To rationalize the tra- ditional theory, the financial theorists have created many new concepts and ideas to fill in the gap in the conventional theory. However, the conventional theory was built on misconceptions, and the outcome will usually be con- trary to what is intended in practice. For example, when commercial banks are preparing their business plan for the next year, they would first forecast the growth in deposits for the next year and then project the growth in loans within the range. Yet, when loans are issued at a faster rate in the follow- ing year, the growth in deposits will be faster than expected, and loan fore- casts are adjusted upwards followed by an increase in deposits, and the cycle goes on. Nevertheless, the problem is that in such a long period of time, the problems of both theory and practice do not undermine the authority of the conventional money theory. The publication of my work “Money Creation and Bank Operations under the Credit Money System” in 2001 resulted in a heated debate. ome new concepts have gradually been accepted by the theorists and the financial circle as of today; however, the concepts in the conventional theory emerge from time to time and disrupt peoples’ thinking and behaviors. Accordingly, my doubt over the timeliness of the conventional money and banking theory is more than my doubt on the theory itself. I also found that the conventional money and banking theory has been wide- spread and deep-rooted. I therefore have a considerable interest in observing its basic phenomenon and exploring the roots of thoughts so as to distinguish 8 ● Reforms in China’s Monetary Policy the underlying reasons behind its origin and development.
eBook - PDFRisk and the Rupee in Pakistan's New Economy
Financial Inclusion and Monetary Change in a Frontier Market
- Antonia Settle(Author)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
184 Risk and the Rupee in Pakistan’s New Economy State Money and Post-Keynesian Theory The schema of money expressed in the definition of monetary aggregates seeks functionality. Although this schematisation necessarily draws on a body of theory that is riven by theoretical debate, monetary aggregates are designed to undertake the ostensibly empirical task of quantifying money in the economy. The Keynesian agenda, alternatively, sets itself much broader goals. At issue is the theorisation of a comprehensive macroeconomic framework in which the conceptualisation of money is consistent with the broader theoretical structure. A coherent conceptualisation of money is particularly important in Keynesian theory, given that Keynes explicitly set out to reorient economic thinking around the peculiarities of monetary dynamics. This section shows how Post-Keynesian thinking engages a state theory of money and how that state theory of money is integral to wider Post-Keynesian thought. In demonstrating the binding of Post- Keynesian thinking to a state theory of money, this section considers three theoretical propositions that structure Post-Keynesian thinking: chartalism, endogenous money and Keynes’ position on the classical dichotomy. It is left to the next section to explore the tensions between the expression of a state theory of money in the Post-Keynesian theoretical framework and frontier money. Central to the argument developed across the chapter is the proposition that Post-Keynesian thinking is intimately tied to a dichotomy that Keynes set out between money and commodities. This ‘money-versus-commodity’ distinction rests upon a definition of money’s uniqueness amongst other assets that is known as chartalist theory. 8 Chartalist theory grew out of nineteenth-century debates about epistemology 9 and draws together sociological, historical, legal and economic perspectives in fierce opposition to neoclassical interpretations of the origins of money.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
