Monetary economics

Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value, and unit of account), and it considers how money can gain acceptance purely because of its convenience as a public good. The discipline has historically prefigured, and remains integrally linked to, macroeconomics. This branch also examines the effects of monetary systems, including regulation of money and associated financial institutions and international aspects.

Modern analysis has attempted to provide microfoundations for the demand for money and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand for output. • Robert Clower, 1967. "A Reconsideration of the Microfoundations of Monetary Theory," Western Economic Journal, 6(1), pp. 1-8.  • _____, 1987. Money and Markets. Cambridge. Description and  chapter-preview.    • David Laidler, 1988. "Taking Money Seriously," Canadian Journal of Economics, 21(4), pp. 687–713. • _____, 1993. The Demand for Money: Theories, Evidence, and Problems, 4th ed. Description.   • _____, 1997. "Notes on the Microfoundations of Monetary Economics," Economic Journal, 107(443), pp. 1213–1223. • Don Patinkin, 1965, 2nd ed. Money, Interest and Prices: An Integration of Monetary and Value Theory. New York: Harper and Row. Introduction to 1990 MIT edition (PDF ), and 1991 evaluation  by Stanley Fischer. • Michael Woodford, 2003. Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press. Description and Table of Contents.. Its methods include deriving and testing the implications of money as a substitute for other assets and as based on explicit frictions.

History
The foundational concept of any modern theory of money is the understanding that the value of fiat money depends upon exchange and not weight (compare with the Arrow–Debreu model).

Research areas
Traditionally, research areas in monetary economics have included:

• Clark Warburton, 1966. Depression, Inflation, and Monetary Policy: Selected Papers, 1945-1953. Johns Hopkins Press. Evaluation in Anna J. Schwartz, Money in Historical Perspective, 1987. • Milton Friedman and Anna Jacobson Schwartz, 1963. A Monetary History of the United States, 1867-1960. Princeton. Page-searchable links to chapters on 1929-41 and 1948-60. • James Tobin, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?" Quarterly Journal of Economics, 84(2), pp. 301-317. • Christopher A. Sims, 1972. "Money, Income, and Causality," American Economic Review, 62(4), pp. 540-552. • _____, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, 70(2), pp. 250 -257. • _____, 2011. "Statistical Modeling of Monetary Policy and its Effects", Nobel Prize lecture. • John P. Judd and John L. Scadding, 1982. "The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature," Journal of Economic Literature, 20(3), pp. 993 -1023. • Christina D. Romer and David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz", NBER Macroeconomics Annual 1989, 4, downloadable at [https://www.nber.org/books/blan89-1 ch. 3] and at  Journal of Monetary Economics, 1994, 34(1), pp. 75-88. Abstract. • Dennis L. Hoffman, Robert H. Rasche, and Margie A. Tieslau, 1995. "The Stability of Long-run Money Demand in Five Industrial Countries," Journal of Monetary Economics, 35(2), pp. 317-339 Abstract. • Robert G. King and Charles I. Plosser, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, 74(3), pp. 363-380. Reprinted in Finn E. Kydland, ed., 1995. Business Cycle Theory, pp. 136-55. • Tack Yun, 1996. "Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles," Journal of Monetary Economics, 37{2}, pp. 345–70. Abstract. • Arturo Estrella and Frederic S. Mishkin, 1997. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?" Journal of Monetary Economics, 40(2), pp. 279-304. Abstract.
 * Empirical determinants and measurement of the money supply, whether narrowly, broadly, or index-aggregated, in relation to economic activity
 * Empirical determinants of the demand for money.
 * Credit theory of money (also called debt theory of money), concerning the relationship between credit and money.
 * 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.
 * Monetary aspects studied by central banks.
 * The monetary/fiscal policy relationship to macroeconomic stability
 * The effect of money supply growth on inflation.
 * The political economy of financial regulation and monetary policy
 * Monetary implications of the asset-price/macroeconomic relation: the quantity theory of money, monetarism, 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. • Benjamin M. Friedman, 2008. "money supply," The New Palgrave Dictionary of Economics, 2nd Edition. v. 5, pp. 745-51. Abstract.

• Burton G. Malkiel, [1987] 2008. "term structure of interest rates," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • Michael W. Brandt and David A. Chapman, 2008. "affine term structure models," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • William Poole, 2005. "Understanding the Term Structure of Interest Rates," speech, New York, Money Marketeers, The Down Town Association. • Bennett T. McCallum, 2005. "Monetary Policy and the Term Structure of Interest Rates," Economic Quarterly, 91(4), pp. 1-21. Federal Reserve Bank of Richmond. • Kenneth N. Kuttner, 2001. "Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market," Journal of Monetary Economics, 47(3), pp. 523-544. Abstract. • 2004. Interest Rates and Monetary Policy. Conference, Federal Reserve Bank of San Francisco and Stanford Institute for Economic Policy Research. Summary and session links. • John Kenneth Galbraith, 1975. Money: Whence it Came, Where it Went, Houghton Mifflin. ISBN 0-7351-0070-5} Extracts and review extracts. • Gauti B. Eggertsson, 2008. "liquidity trap," .The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • Athanasios Orphanides, 2004. "Monetary Policy in Deflation: The Liquidity Trap in History and Practice," North American Journal of Economics and Finance, 15(1), pp. 101-124. Abstract. • Ben S. Bernanke, 2000, "Japanese Monetary Policy: A Case of Self-Induced Paralysis?" ch. 7, pp. 149-66 in Japan's Financial Crisis and Its Parallels to US Experience, Adam S. Posen and Ryoichi Mikitani, ed. • _____, 2003. "Some Thoughts on Monetary Policy in Japan," May 31, (speech) Federal Reserve Board. • _____, 2005. Essays on the Great Depression, ch. 1-4. Princeton. Description, TOC , and ch. 1, " The Macroeconomics of the Great Depression," preview. • Satyajit Chatterjee and P. Dean Corbae, 2008. "Great Depression, monetary and financial forces in," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • G.J. Santoni, 1987. "The Great Bull Markets 1924-29 and 1982-87: Speculative Bubbles or Economic Fundamentals?" Federal Reserve Bank of St. Louis Review, November, pp. 16-30. • Richard C. Koo, 2008. The Holy Grail of Macro Economics: Lessons From Japan's Great Recession, Wiley. Description and Review. • Carmen M. Reinhart and Kenneth S. Rogoff, 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press. Description, ch. 1 ("Varieties of Crises and their Dates," pp. 3-20), and chapter-preview links. • Kevin H. O'Rourke and Barry Eichengreen, 2009. "A Tale of Two Depressions," pp. 1-8. VoxEU.org. • John Quiggin, 2010. Zombie Economics: How Dead Ideas Still Walk among Us, ch. 2-3 & 5. Princeton U.P. Description,  TOC, and Introduction. • Christopher L. Foote and Paul S. Willen, 2011. "subprime mortgage crisis, the," The New Palgrave Dictionary of Economics, Online Edition. Abstract. • Thomas J. Sargent, 2011. "United States Then, Europe Now," Nobel lecture, sect. 7, Lessons for Now. • Roger Lowenstein, 2012. "The Villain," (front-cover title: "The Hero"), The Atlantic, 309(2), April, pp. 48-60. Bernanke, other economists, and politicians on U.S. monetary policy since 2006.
 * Monetary impacts on interest rates and the term structure of interest rates • Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, 71(3), pp. pp. 280-283.  Briefer description.
 * Lessons of monetary/financial history • Michael D. Bordo, 2008. "monetary policy, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract and pre-publication copy.

• From The New Palgrave Dictionary of Economics, 2008. 2nd Edition: "rational expectations" by Thomas J. Sargent. Abstract. "inflation expectations" by Bennett T. McCallum. Abstract. "inflation targeting" by Lars E.O. Svensson. Abstract and pre-publication copy.    • Thomas J. Sargent and Neil Wallace, 1975. "'Rational' Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, 83(2), pp. 241-254. • Thomas J. Sargent, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, 84(2), pp. 207 -238. Reprinted in Lucas and Sargent, ed., 1981, Rational Expectations and Econometric Practice, University of Minnesota Press, 1981. v. 2, pp. 521-51.  • Christopher A. Sims, 1980. "Macroeconomics and Reality", Econometrica, 48(1), pp. 1-48. • Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," in Robert E. Hall, ed., Inflation: Causes and Effects, ch. 2, pp. 41-98. Chicago. • Steven M. Sheffrin, 1996, 2nd Ed. Rational Expectations. Cambridge. Description and preview. • Robert E. Lucas Jr., 1972. "Expectations and the Neutrality of Money," Journal of Economic Theory, 4(2), pp. 103-124. • _____, 1976. "Econometric Policy Evaluation: A Critique," Carnegie-Rochester Conference Series on Public Policy, 1(1), pp. 19–46. • _____, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, 70(5), pp. 1005-1014. • _____, 1995. "Monetary Neutrality,"  Nobel Prize Lecture. • Stanley Fischer, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, 85(1), pp. 191-205. • Robert J. Barro, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, 86(4), pp. 549 -580, reprinted in Lucas and Sargent, ed., 1981, Rational Expectations and Econometric Practice, University of Minnesota Press, pp. 585-616. • Clifford L. F. Attfield and Nigel W. Duck, 1983. "The Influence of Unanticipated Money Growth on Real Output: Some Cross-Country Estimates," Journal of Money, Credit and Banking, 15(4), pp. 442 -454. • Olivier J. Blanchard, 1990. "Why Does Money Affect Output? A Survey," in B. M. Friedman and F. H. Hahn, ed., 1990, Handbook of Monetary Economics, v. 2, ch. 15, pp. 779-835. "monetary business cycles (imperfect information)" by Christian Hellwig. Abstract. "bubbles" by Markus K. Brunnermeier. "speculative bubbles" by Miguel A. Iraola and Manuel S. Santos. Abstract.
 * Transmission mechanisms of monetary policy as to the macroeconomy
 * Neutrality of money vs. money illusion as to a change in the money supply, price level, or inflation on output
 * Tests, testability, and implications of rational-expectations theory as to changes in output or inflation from monetary policy • Milton Friedman, [1987] 2008. "quantity theory of money." sect. 4, The Theory of Rational Expectations, The New Palgrave Dictionary of Economics. 2nd Edition.  Earlier at John Eatwell et al., 1989), Money: The New Palgrave, pp. 26 -28.
 * Monetary implications of imperfect and asymmetric information • From 2008, The New Palgrave Dictionary of Economics, 2nd Edition:

"information cascades," by Sushil Bikhchandani, David Hirshleifer and Ivo Welch. Abstract. • Alex Cukierman and Allan H. Meltzer, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, 54(5), pp. 1099-1128. • Matthew B. Canzoneri, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, 75(5), pp. 1056 -1070. • Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," in R. Glenn Hubbard, ed., Financial Markets and Financial Crises (description), Chicago, pp. 69-108 • Joseph E. Stiglitz and Andrew M. Weiss, 1992. "Asymmetric Information in Credit Markets: Implications for Macro-Economics," Oxford Economic Papers, 44(4), pp. 694-724. • Pradeep Dubey, John Geanakoplos, and Martin Shubik, 1987. "A Critique of Rational Expectations Equilibrium," Journal of Mathematical Economics, 16(2), pp. 105-137. • Joseph Stiglitz and Bruce Greenwald, 2003. Towards a New Paradigm in Monetary Economics. Cambridge. Arrow page-searchable Description and Table of Contents chapter-preview links. • Franklin Allen and Douglas Gale, 2000 "Financial Contagion," Journal of Political Economy, 108(1), pp. 1-33. • Laura E. Kodres and Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, 57(2), pp. 769-799. and fraudulent finance


 * Game theory as a modeling paradigm for monetary and financial institutions
 * Possible advantages of following a monetary-policy rule to avoid inefficiencies of time inconsistency from discretionary policy

Islamic Golden Age
At around the same time in the medieval Islamic world, a vigorous monetary economy was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the dinar). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of credit, cheques, promissory notes, savings accounts, transactional accounts, loaning, trusts, exchange rates, the transfer of credit and debt, and banking institutions for loans and deposits.

1500s to 1700s


In the Indian subcontinent, Sher Shah Suri (1540–1545), introduced a silver coin called a rupiya, weighing 178 grams. Its use was continued by the Mughal rulers. The history of the rupee traces back to Ancient India circa 3rd century BC. Ancient India was one of the earliest issuers of coins in the world, along with the Lydian staters, several other Middle Eastern coinages and the Chinese wen. The term is from rūpya, a Sanskrit term for silver coin, from Sanskrit rūpa, beautiful form.

The imperial taka was officially introduced by the monetary reforms of Muhammad bin Tughluq, the emperor of the Delhi Sultanate, in 1329. It was modeled as representative money, a concept pioneered as paper money by the Mongols in China and Persia. The tanka was minted in copper and brass. Its value was exchanged with gold and silver reserves in the imperial treasury. The currency was introduced due to the shortage of metals.

Both the Kabuli rupee and the Kandahari rupee were used as currency in Afghanistan prior to 1891, when they were standardized as the Afghan rupee. The Afghan rupee, which was subdivided into 60 paisas, was replaced by the Afghan afghani in 1925.

Until the middle of the 20th century, Tibet's official currency was also known as the Tibetan rupee.

Serious interest in the concepts behind money occurred during the dramatic period of inflation in the late 15th to early 17th centuries 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.

During the eighteenth century, the concept of banknotes became more common in Europe. David Hume referred to it as "this new invention of paper".

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

In 1720, Isaac Gervaise wrote The System or Theory of the Trade of the World. He criticised mercantilism and state-supported credit for the inflation problems of his era.

Della Moneta, was published by Ferdinando Galiani in 1751, and is arguably the first modern text on economic theory. It was printed twenty-five years before Adam Smith's more famous book, The Wealth of Nations, which touched on some of the same topics. Della Moneta covered many modern monetary concepts, including the value, origin, and regulation of money. It carefully examined the possible causes for money's value to fluctuate.

The year following, 1752, Of the Balance of Trade was published by Hume. He argued 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.