Monetary economics is the branch of
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
that studies the different theories of money: it provides a framework for analyzing
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
and considers its functions (as
medium of exchange,
store of value, and
unit of account
In economics, unit of account is one of the functions of money. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of ...
), 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
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...
. This branch also examines the effects of
monetary system
A monetary system is a system where a government manages money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks.
Commodity money system
A commodity mon ...
s, including regulation of money and associated
financial institution
A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...
s and international aspects.
Modern analysis has attempted to provide
microfoundations
Microfoundations are an effort to understand macroeconomic phenomena in terms of individual agents' economic behavior and interactions.Maarten Janssen (2008),Microfoundations, in ''The New Palgrave Dictionary of Economics'', 2nd ed. Research in mi ...
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
In economics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is the ...
for output. Its methods include deriving and testing the implications of money as a substitute for other assets and as based on explicit frictions.
History
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
The dinar () is the name of the principal currency unit in several countries near the Mediterranean Sea, with a more widespread historical use. The English word "dinar" is the transliteration of the Arabic دينار (''dīnār''), which was bor ...
). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
,
cheque
A cheque (or check in American English) is a document that orders a bank, building society, or credit union, to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing ...
s,
promissory note
A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financing instrument and a debt instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of ...
s,
savings account
A savings account is a bank account at a retail banking, retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditi ...
s,
transactional account
A transaction account (also called a checking account, cheque account, chequing account, current account, demand deposit account, or share account at credit unions) is a deposit account or bank account held at a bank or other financial instituti ...
s,
loan
In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
The document evidencing the deb ...
ing,
trusts,
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
s, the transfer of credit and
debt
Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
,
and
banking institutions for loans and
deposits.
1500s to 1700s

In the
Indian subcontinent
The Indian subcontinent is a physiographic region of Asia below the Himalayas which projects into the Indian Ocean between the Bay of Bengal to the east and the Arabian Sea to the west. It is now divided between Bangladesh, India, and Pakista ...
,
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
Anatomically modern humans first arrived on the Indian subcontinent between 73,000 and 55,000 years ago. The earliest known human remains in South Asia date to 30,000 years ago. Sedentism, Sedentariness began in South Asia around 7000 BCE; ...
circa 3rd century BC. Ancient India was one of the earliest issuers of coins in the world,
along with the Lydian
stater
The stater (; ) was an ancient coin used in various regions of Greece. The term is also used for similar coins, imitating Greek staters, minted elsewhere in ancient Europe.
History
The stater, as a Greek silver currency, first as ingots, and ...
s, several other Middle Eastern coinages and the
Chinese wen.
The term is from ''rūpya'', a Sanskrit term for
silver coin
Silver coins are one of the oldest mass-produced form of coinage. Silver has been used as a coinage metal since the times of the Greeks; their silver drachmas were popular trade coins. The ancient Persians used silver coins between 612–330 B ...
, 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
The Delhi Sultanate or the Sultanate of Delhi was a Medieval India, late medieval empire primarily based in Delhi that stretched over large parts of the Indian subcontinent for more than three centuries. , in 1329. It was modeled as
representative money, a concept pioneered as paper money by the
Mongols
Mongols are an East Asian ethnic group native to Mongolia, China ( Inner Mongolia and other 11 autonomous territories), as well as the republics of Buryatia and Kalmykia in Russia. The Mongols are the principal member of the large family o ...
in
China
China, officially the People's Republic of China (PRC), is a country in East Asia. With population of China, a population exceeding 1.4 billion, it is the list of countries by population (United Nations), second-most populous country after ...
and
Persia
Iran, officially the Islamic Republic of Iran (IRI) and also known as Persia, is a country in West Asia. It borders Iraq to the west, Turkey, Azerbaijan, and Armenia to the northwest, the Caspian Sea to the north, Turkmenistan to the nort ...
. 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
Afghanistan, officially the Islamic Emirate of Afghanistan, is a landlocked country located at the crossroads of Central Asia and South Asia. It is bordered by Pakistan to the Durand Line, east and south, Iran to the Afghanistan–Iran borde ...
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
The afghani (currency sign, sign: or Af (plural: Afs) ISO 4217, code: AFN; ; ) is the official currency of Afghanistan, a status it has held since the 1920s. It is nominally subdivided into 100 ''Afghan pul, puls'' (پول), although there are ...
in 1925.
Until the middle of the 20th century,
Tibet
Tibet (; ''Böd''; ), or Greater Tibet, is a region in the western part of East Asia, covering much of the Tibetan Plateau and spanning about . It is the homeland of the Tibetan people. Also resident on the plateau are other ethnic groups s ...
'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
Spain, or the Kingdom of Spain, is a country in Southern Europe, Southern and Western Europe with territories in North Africa. Featuring the Punta de Tarifa, southernmost point of continental Europe, it is the largest country in Southern Eur ...
.
At the end of this period, the first modern texts on monetary economics were beginning to appear.
During the eighteenth century, the concept of
banknote
A banknote or bank notealso called a bill (North American English) or simply a noteis a type of paper money that is made and distributed ("issued") by a bank of issue, payable to the bearer on demand. Banknotes were originally issued by commerc ...
s became more common in Europe.
David Hume
David Hume (; born David Home; – 25 August 1776) was a Scottish philosopher, historian, economist, and essayist who was best known for his highly influential system of empiricism, philosophical scepticism and metaphysical naturalism. Beg ...
referred to it as "this new invention of paper".
In 1705,
John Law in
Scotland
Scotland is a Countries of the United Kingdom, country that is part of the United Kingdom. It contains nearly one-third of the United Kingdom's land area, consisting of the northern part of the island of Great Britain and more than 790 adjac ...
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
Mercantilism is a economic nationalism, nationalist economic policy that is designed to maximize the exports and minimize the imports of an economy. It seeks to maximize the accumulation of resources within the country and use those resources ...
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
Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
's more famous book, ''
The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', usually referred to by its shortened title ''The Wealth of Nations'', is a book by the Scottish people, Scottish economist and moral philosophy, moral philosopher Adam Smith; ...
'', 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.
Modern Theory of money
The foundational concept of any modern theory of money is the understanding that the value of
fiat money
Fiat money is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tende ...
depends upon exchange and not weight (compare with the
Arrow–Debreu model
In mathematical economics, the Arrow–Debreu model is a theoretical general equilibrium model. It posits that under certain economic assumptions (convex preferences, perfect competition, and demand independence), there must be a set of prices su ...
).
Research areas
Traditionally, research areas in monetary economics have included:
*
Empirical
Empirical evidence is evidence obtained through sense experience or experimental procedure. It is of central importance to the sciences and plays a role in various other fields, like epistemology and law.
There is no general agreement on how t ...
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
The wealth effect is the change in spending that accompanies a change in perceived wealth.
Usually the wealth effect is positive: spending changes in the same direction as perceived wealth.
Effect on individuals
Changes in a consumer's wealth caus ...
on
net worth.
* Monetary aspects studied by
central bank
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
s.
* The monetary/
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...
relationship to macroeconomic stability
* The effect of money supply growth on
inflation
In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
.
* The
political economy
Political or comparative economy is a branch of political science and economics studying economic systems (e.g. Marketplace, markets and national economies) and their governance by political systems (e.g. law, institutions, and government). Wi ...
of
financial regulation
Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest consi ...
and monetary policy
* Monetary implications of the asset-price/macroeconomic relation: the
quantity theory of money,
monetarism
Monetarism is a school of thought in monetary economics that emphasizes the role of policy-makers in controlling the amount of money in circulation. It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetar ...
, 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
An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
.
* Monetary impacts on interest rates and the
term structure of interest rates
* Lessons of monetary/financial history
*
Transmission mechanisms of
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...
as to the macroeconomy
*
Neutrality of money vs.
money illusion as to a change in the money supply, price level, or
inflation
In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
on output
* Tests, testability, and implications of
rational-expectations theory as to changes in output or inflation from monetary policy
* Monetary implications of imperfect and
asymmetric information and fraudulent finance
[• Paul Povel, Rajdeep Singh, and Andrew Winton, 2007. "Booms, Busts, and Fraud," ''Review of Financial Studies'', 20(4), pp]
1219-1254.
• William K. Black, 2005. ''The Best Way to Rob a Bank Is to Own One''
Description
and
preview
• _____, 2005. "'Control Frauds' as Financial Super-predators: How 'Pathogens' Make Financial Markets Inefficient," ''Journal of Socio-Economics'', 34(6), pp
Abstract.
• _____, 2009. "Those Who Forget the Regulatory Successes of the Past are Condemned to Failure," ''Economic & Political Weekly'', 44(13), pp. 80-86,
Abstract.
*
Game theory
Game theory is the study of mathematical models of strategic interactions. It has applications in many fields of social science, and is used extensively in economics, logic, systems science and computer science. Initially, game theory addressed ...
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
In macroeconomics, discretionary policy is an economic policy based on the ''ad hoc'' judgment of policymakers as opposed to policy set by predetermined rules. For instance, a central banker could make decisions on interest rates on a case-by-cas ...
See also
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
* '
* '
*
*
Notes
References
* ''Handbook of Monetary Economics'', Elsevier.
:
Friedman, Benjamin M., and
Frank H. Hahn, ed., 1990. v. 1 links fo
description & contentsand chapter-outlin
previews:_____, 1990. v. 2 links fo
description & contentsand chapter-outlin
previews.:Friedman, Benjamin, and
Michael Woodford, 2010. v. 3A & 3B links fo
description& and chapte
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
Descriptionand chapter previews, pp
ixx.
* 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 Handbooks, 349 pp.
an
preview
* _____, 1983. ''Money: in Disequilibrium'', Cambridge Economic Handbooks, 382 pp.
an
preview
* Goodhart, Charles, 1989. ''Money, Information and Uncertainty'', 2nd Ed. MIT Press
Description
an
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.
Description
an
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 previe
links.
Oxford.
* ''The New Palgrave Dictionary of Finance and Money'', 1992. 3 v
Description.
* '' The New Palgrave Dictionary of Economics Online'', 2008. Abstract links fo
"Monetary Economics"
(alphabetical) an
"monetary".
* Rabin, Alan A., 2004. ''Monetary Theory'' MPG Books: London. Arrow-page-searchabl
chapter
previews.
*
* Walsh, Carl E., 2003. ''Monetary Theory and Policy'', 2nd ed., MIT Press.
Description
an
chapter-preview links.
*
External links
''Journal of Money, Credit and Banking''''Journal of Monetary Economics''*
NBER Working Papers: Links to
JEL classes of abstracts or downloads fo
Macroeconomics and Monetary Economics including:
:
ttps://www.slideshare.net/BabasabPatil/money-credit-and-finance#btnNext Presentation of Money, credit and finance an slideshow:What is money? A slideshow https://www.slideshare.net/MitchGreen/lesson-1-what-is-money#btnNext
{{DEFAULTSORT:Monetary Economics
Macroeconomics