Monetary theory


Monetary theory

Monetary theory (known also as money/macro theory) is a major branch of macroeconomics and a framework of analysis that deals with monetary systems and their effect on equilibrium with production, employment and the level of prices within a macroeconomy. [Elgar, Edward., Rabin, Alan A. (2004), page 1] In its own definition, it deals with the difference between "broad money", typically non-circulating currency such as deposit certificates and treasury bills and "shallow money" that circulates amongst the population of an economy. Within monetary theory, the problems and benefits between these monies are compared using "spending" and "goods-against-goods" (Say's Law) [Elgar, Edward., Rabin, Alan A. (2004), page 1 -- "Two approaches tackle the central questions of macroeconomics. One we call the spending approach. A second, the goods-against-goods (or Say’s Law) approach, goes further back to the fundamentals of production and the exchange of goods against goods."] approaches, each of which stipulate the socio-economic repercussions when one approach dominates the market over the other in varying degrees.

The current state of monetary theory

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, 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 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."

ee also

*Neutrality of money
*Inflation
*Real versus nominal in economics
*Quantity theory of money

Notes

References

* Barnett, William A. (2008). "monetary aggregation," "The New Palgrave Dictionary of Economics", 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_M000351&q=monetary%20economics&topicid=&result_number=3 Abstract.]
* Dimand, Robert W. "monetary economics, history of," "The New Palgrave Dictionary of Economics", 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_M000394&q=monetary%20economics%20&topicid=&result_number=1 Abstract.]
* Friedman, Benjamin M. (2008). "money supply," "The New Palgrave Dictionary of Economics", 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_M000236&q=monetary%20economics%20&topicid=&result_number=55 Abstract.]
* Friedman, Benjamin N., and F.H. Hahn, ed. (1990). "Handbook of Monetary Economics", v. 1, 2 . Elsevier. Description links for for [http://www.elsevier.com/wps/find/bookdescription.cws_home/601125/description#toc v. 1] and [http://www.elsevier.com/wps/find/bookdescription.cws_home/601126/description#description v. 2.]
* Ireland, Peter N. (2008), "monetary transmission mechanism," "The New Palgrave Dictionary of Economics", 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_M000214&q=monetary%20economics%20&topicid=&result_number=2 Abstract.]

* Elgar, Edward., Rabin, Alan A. (2004). "Monetary Theory" MPG Books: London
* Laurence Harris, 'Monetary Theory". New York: McGraw-Hill (1981).
*cite book
last= Galbraith
first= John Kenneth
authorlink= John Kenneth Galbraith
title= Money: Whence it Came, Where it Went
publisher= Houghton Mifflin
date= 2001
isbn= 0735100705
Popular history of monetary institutions.
*cite book
last= Walsh
first= Carl E.
authorlink= Carl E. Walsh
title= Monetary Theory and Policy (2nd ed.)
publisher= MIT Press
date= 2003
isbn= 0262232316
Standard graduate-level textbook.


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