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Monetary theory
 
 
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Monetary economics is a branch of economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
 that historically prefigured and remains integrally linked to macroeconomics
Macroeconomics

Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole....
. It provides a framework for analyzing money
Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
 in its functions as a medium of exchange
Medium of exchange

A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade ? one must want exactly what the other has to offer, when and where it is offered, so that the exchange...
, store of value
Store of value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
, and unit of account
Unit of account

A unit of account is a standard monetary unit of measurement of the market value/cost of goods, services, or assets. It is one of three well-known functions of money....
. It considers how money, for example fiat currency
Fiat currency

Fiat currency is money that exists because an authority or custom declares it to be money. . It achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable....
, can gain acceptance purely because of its convenience as a public good
Public good

In economics, a public good is a Good that is rivalry ed and excludability. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good....
. It examines the effects of monetary system
Monetary system

A monetary system secures the proper functioning of money by regulating economic agents, transaction types, and money supply.Monetary systems are traditionally formed by the policy decisions of individual governments and administrated as a domestic economic issue....
s, including regulation of money and associated financial institutions and international arrangements.

Modern analysis has attempted to provide a more micro-based
Microfoundations

In economics, the term microfoundations refers to the microeconomics analysis of the behavior of individual Agent such as households or firms that underpins a macroeconomics theory...
 formulation of the demand for money
Liquidity preference

Liquidity preference in macroeconomic theory refers to the Money demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand for money....
  and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand
Aggregate demand

In economics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels....
 for output.






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Monetary economics is a branch of economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
 that historically prefigured and remains integrally linked to macroeconomics
Macroeconomics

Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole....
. It provides a framework for analyzing money
Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
 in its functions as a medium of exchange
Medium of exchange

A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade ? one must want exactly what the other has to offer, when and where it is offered, so that the exchange...
, store of value
Store of value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
, and unit of account
Unit of account

A unit of account is a standard monetary unit of measurement of the market value/cost of goods, services, or assets. It is one of three well-known functions of money....
. It considers how money, for example fiat currency
Fiat currency

Fiat currency is money that exists because an authority or custom declares it to be money. . It achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable....
, can gain acceptance purely because of its convenience as a public good
Public good

In economics, a public good is a Good that is rivalry ed and excludability. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good....
. It examines the effects of monetary system
Monetary system

A monetary system secures the proper functioning of money by regulating economic agents, transaction types, and money supply.Monetary systems are traditionally formed by the policy decisions of individual governments and administrated as a domestic economic issue....
s, including regulation of money and associated financial institutions and international arrangements.

Modern analysis has attempted to provide a more micro-based
Microfoundations

In economics, the term microfoundations refers to the microeconomics analysis of the behavior of individual Agent such as households or firms that underpins a macroeconomics theory...
 formulation of the demand for money
Liquidity preference

Liquidity preference in macroeconomic theory refers to the Money demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand for money....
  and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand
Aggregate demand

In economics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels....
 for output. It has also derived and tested the implications of money as a substitute for other assets. and as based on explicit frictions.

Research areas have included:
  • the empirical
    Empirical

    The word empirical denotes information gained by means of observation, experience, or experiment, as opposed to theory. A central concept in science and the scientific method is that all evidence must be empirical, or empirically based, that is, dependent on evidence or Logical consequence that are observable by the senses....
     measurement of the money supply
    Money supply

    In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
    , whether narrowly, broadly-
    Money supply

    In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
    , or index-aggregated, in relation to economic activity,
  • debt-deflation and balance-sheet
    Balance sheet

    In financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year....
     theories, which hypothesize that a change in net worth
    Wealth (economics)

    In economics and business, wealth of a person or nation is the value of assets owned net of Liability#Financial accounting owed at a point in time....
     of borrowers amplifies business fluctuations by changing credit in the same direction
  • the relation of financial and macroeconomic stability and its implications
  • the importance and stability of the relation between the money supply and interest rates, the price level
    Price level

    A price level is a hypothetical measure of overall prices for some set of Good s and Service s, in a given region during a given interval, normalized relative to some base set....
    , and nominal and real output of an economy.
  • transmission mechanisms of monetary policy
    Monetary policy

    Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy....
     as to the macroeconomy
  • possible advantages of following a monetary-policy rule
    Taylor rule

    A Taylor rule is a monetary policy rule that stipulates how much the central bank should change the nominal interest rate in response to divergences of actual Gross domestic product from potential output GDP and of actual inflation rates from a target inflation rates....
     to avoid inefficiencies of time inconsistency from discretionary policy
    Discretionary policy

    Discretionary policy is a term used to describe macroeconomics policy based on the ad hoc judgment of policymakers as opposed to policy set by predetermined rules....
  • "anything that central bank
    Central bank

    A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states....
    ers should be interested in.


Current state of monetary economics

Since 1990, the classical form of monetarism has been questioned because of events which many economists have interpreted as being inexplicable in monetarist terms, namely 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
Alan Greenspan

Alan Greenspan is an United States economist and was the Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and providing consulting for firms through his company, Greenspan Associates LLC....
, former chairman of the Federal Reserve, argued that the 1990s decoupling was explained by a virtuous cycle of productivity and investment on one hand, and a certain degree of "irrational exuberance" in the investment sector. Economist Robert Solow
Robert Solow

Robert Merton Solow is an United States economist particularly known for his work on the theory of economic growth. He was awarded the John Bates Clark Medal and the 1987 Nobel Memorial Prize in Economic Sciences....
 of MIT suggested that the 2001-2003 failure of the expected economic recovery should be attributed not to monetary policy failure but to the breakdown in productivity growth in crucial sectors of the economy, most particularly retail trade. He noted that five sectors produced all of the productivity gains of the 1990s, and that while the growth of retail and wholesale trade produced the smallest growth, they were by far the largest sectors of the economy experiencing net increase of productivity. "2% may be peanuts, but being the single largest sector of the economy, that's an awful lot of peanuts."

See also

  • Money
    Money

    Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
  • Money supply
    Money supply

    In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
  • Monetary base
    Monetary base

    In economics, the monetary base is a term relating to the money supply, the amount of money in the economy. The monetary base comprises only coins, paper money, and commercial banks' bank reserves with the central bank....
  • Equation of exchange
    Equation of exchange

    In economics, the equation of exchange is the relation:where, for a given period, is the total amount of money supply in circulation on average in an economy....
  • Quantity theory of money
    Quantity theory of money

    In economics, the quantity theory of money is a theory emphasizing the positive relationship of overall prices or the Real versus nominal value of expenditures to the money supply#Scope....
  • Inflation
    Inflation

    In economics, inflation is a rise in the general price level of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply ; however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflatio...
  • Neutrality of money
    Neutrality of money

    In economics, neutrality of money is the idea that a change in the stock of money affects only real versus nominal value variables in the economy such as prices, wages and exchange rates, having no effect on real versus nominal value variables like GDP, employment, and consumption ....
  • Money illusion
    Money illusion

    Money illusion refers to the tendency of people to think of currency in Real versus nominal value , terms. In other words, the numerical/face value of money is mistaken for its purchasing power ....
  • Classical dichotomy
    Classical dichotomy

    In macroeconomics, the classical dichotomy refers to an idea attributed to classical economics and pre-Keynesian economics that Real versus nominal value can be analyzed separately....
  • Income velocity of money
  • Liquidity preference
    Liquidity preference

    Liquidity preference in macroeconomic theory refers to the Money demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand for money....
  • Money demand
    Money demand

    The demand for money is the desired holding of money balances in the form of cash or bank deposits.Money is dominated as store of value by interest bearing assets....
  • Monetarism
    Monetarism

    Monetarism is a school of economic thought concerning the determination of measures of national income and output and monetary economics. It focuses on the supply of money in an economy as the primary means by which the rate of inflation is determined....
  • Monetary Disequilibrium Theory
    Monetary Disequilibrium Theory

    The Monetary Disequilibrium Theory presents an alternative to the real business cycle model and the quantity theory of money consideredas only a long-run theory of the price level....
  • Currency crisis
    Currency crisis

    A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value....
  • Monetary policy
    Monetary policy

    Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy....
  • Taylor rule
    Taylor rule

    A Taylor rule is a monetary policy rule that stipulates how much the central bank should change the nominal interest rate in response to divergences of actual Gross domestic product from potential output GDP and of actual inflation rates from a target inflation rates....


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