Monetary economics is the branch of

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

that studies the different competing 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 ar ...

and considers its functions (such as

medium of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. The origin of "mediums of exchange" in human societies is ass ...

store of value A store of value is any commodity or asset that would normally retain purchasing power into the future and is the function of the asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. The mos ...

and

unit of account In economics, unit of account is one of the money functions. 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 rela ...

), 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 (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

. This branch also examines the effects of

monetary system A monetary system is a system by which a government provides 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 m ...

s, including regulation of money and associated

financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...

s and international aspects. Modern analysis has attempted to provide

microfoundations Microfoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions.Maarten Janssen (2008),Microfoundations, in ''The New Palgrave Dictionary of Economics'', 2nd ed. Research in microf ...

for the

demand for money In monetary economics, the demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits rather than investments. It can refer to the demand for money narrowly defined as M1 (directly spendable ...

and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the

aggregate demand In macroeconomics, 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 ...

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

The foundational concept of any modern theory of money is the understanding that the value of

fiat money Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometim ...

depends upon exchange and not weight (compare with the Arrow-Debreu model).

Research areas

Traditionally, research areas in monetary economics have included: *

Empirical Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences and ...

determinants and measurement of the

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...

, whether narrowly, broadly, or index- aggregated, in relation to economic activity * Empirical determinants of the

. *

Credit theory of money Credit theories of money, also called debt theories of money, are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and ...

(also called debt theory of money), concerning the relationship between credit and money. *

Debt deflation Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Bank assets fall because of the defaults an ...

and balance-sheet theories, which hypothesize that over-extension of credit associated with a subsequent asset-price fall generate

business fluctuation Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examini ...

s 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 cause ...

net worth Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...

. * Monetary aspects studied by

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...

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 variabl ...

relationship to macroeconomic stability * The effect of money supply growth on

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

. * The

political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...

financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handle ...

and monetary policy * Monetary implications of the asset-price/macroeconomic relation: the

quantity theory of money In monetary economics, the quantity theory of money (often abbreviated QTM) is one of the directions of Western economic thought that emerged in the 16th-17th centuries. The QTM states that the general price level of goods and services is directly ...

monetarism Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on nati ...

, and the importance and stability of the relation between the money supply and interest rates, the

price level The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set ...

, and nominal and real output of an

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

. * 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 control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...

as to the macroeconomy * Neutrality of money vs.

money illusion In economics, money illusion, or price illusion, is a cognitive bias where money is thought of in nominal, rather than real terms. In other words, the face value (nominal value) of money is mistaken for its purchasing power (real value) at a prev ...

as to a change in the money supply, price level, or

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 In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which can ...

and fraudulent finance *

Game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...

as a modeling paradigm for monetary and financial institutions * Possible advantages of following a monetary-policy

rule Rule or ruling may refer to: Education * Royal University of Law and Economics (RULE), a university in Cambodia Human activity * The exercise of political or personal control by someone with authority or power * Business rule, a rule pert ...

to avoid inefficiencies of time inconsistency from discretionary policy

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 principal currency unit in several countries near the Mediterranean Sea, and its historical use is even more widespread. The modern dinar's historical antecedents are the gold dinar and the silver dirham, the main coin ...

). 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 (American English; see spelling differences) is a document that orders a bank (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 pers ...

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 ...

savings account A savings account is a bank account at a 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. Traditionally, transa ...

transactional account A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the ...

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

ing,

trusts A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "sett ...

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 t ...

s, the transfer of credit and

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

, and banking institutions for loans and deposits.

1500s to 1700s

In the

Indian subcontinent The Indian subcontinent is a physiographical region in Southern Asia. It is situated on the Indian Plate, projecting southwards into the Indian Ocean from the Himalayas. Geopolitically, it includes the countries of Bangladesh, Bhutan, In ...

Sher Shah Suri Sher Shah Suri ( ps, شیرشاه سوری) (1472, or 1486 – 22 May 1545), born Farīd Khān ( ps, فرید خان) , was the founder of the Sur Empire in India, with its capital in Sasaram in modern-day Bihar. He standardized the silver coin ...

(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 According to consensus in modern genetics, anatomically modern humans first arrived on the Indian subcontinent from Africa between 73,000 and 55,000 years ago. Quote: "Y-Chromosome and Mt-DNA data support the colonization of South Asia by ...

circa 3rd century BC. Ancient India was one of the earliest issuers of coins in the world, along with the Lydian

stater The stater (; grc, , , statḗr, weight) 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 curre ...

s, several other Middle Eastern coinages and the Chinese wen. The term is from ''rūpya'', a Sanskrit term for

silver coin Silver coins are considered 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 612–33 ...

, from Sanskrit rūpa, beautiful form. The imperial

taka The Bangladeshi taka ( bn, টাকা, sign: , code: BDT, short form: Tk) is the currency of the People's Republic of Bangladesh. In Unicode, it is encoded at . Issuance of bank notes 10 and larger is controlled by Bangladesh Bank, whil ...

was officially introduced by the monetary reforms of

Muhammad bin Tughluq Muhammad bin Tughluq (1290 – 20 March 1351) was the eighteenth Sultan of Delhi. He reigned from February 1325 until his death in 1351. The sultan was the eldest son of Ghiyath al-Din Tughluq, founder of the Tughlaq dynasty. In 1321, the youn ...

, the emperor of the

Delhi Sultanate The Delhi Sultanate was an Islamic empire based in Delhi that stretched over large parts of the Indian subcontinent for 320 years (1206–1526).

, in 1329. It was modeled as representative money, a concept pioneered as paper money by the

Mongols The Mongols ( mn, Монголчууд, , , ; ; russian: Монголы) are an East Asian ethnic group native to Mongolia, Inner Mongolia in China and the Buryatia Republic of the Russian Federation. The Mongols are the principal member ...

China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's List of countries and dependencies by population, most populous country, with a Population of China, population exceeding 1.4 billion, slig ...

and

Persia Iran, officially the Islamic Republic of Iran, and also called Persia, is a country located in Western Asia. It is bordered by Iraq and Turkey to the west, by Azerbaijan and Armenia to the northwest, by the Caspian Sea and Turkmeni ...

. 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 The Afghan rupee was the currency of Afghanistan until 1925. Before 1891, silver rupees circulated with copper ''falus'' and gold ''mohur''. The three metals had no fixed exchange rate between them, with different regions issuing their own coins. ...

and the Kandahari rupee were used as currency in

Afghanistan Afghanistan, officially the Islamic Emirate of Afghanistan,; prs, امارت اسلامی افغانستان is a landlocked country located at the crossroads of Central Asia and South Asia. Referred to as the Heart of Asia, it is borde ...

prior to 1891, when they were standardized as the

Afghan rupee The Afghan rupee was the currency of Afghanistan until 1925. Before 1891, silver rupees circulated with copper ''falus'' and gold ''mohur''. The three metals had no fixed exchange rate between them, with different regions issuing their own coins. ...

. The Afghan rupee, which was subdivided into 60 paisas, was replaced by the

Afghan afghani The afghani ( sign: or Af (plural: Afs) code: AFN; Pashto: ; Persian : ) is the currency of Afghanistan, which traditionally is issued by the nation's central bank called Da Afghanistan Bank. It is nominally subdivided into 100 '' puls'' (پ� ...

in 1925. Until the middle of the 20th century,

Tibet Tibet (; ''Böd''; ) is a region in East Asia, covering much of the Tibetan Plateau and spanning about . It is the traditional homeland of the Tibetan people. Also resident on the plateau are some other ethnic groups such as Monpa people, ...

'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 , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = '' Plus ultra'' (Latin)(English: "Further Beyond") , national_anthem = (English: "Royal March") , ...

. 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—also called a bill (North American English), paper money, or simply a note—is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes w ...

s became more common in Europe.

David Hume David Hume (; born David Home; 7 May 1711 NS (26 April 1711 OS) – 25 August 1776) Cranston, Maurice, and Thomas Edmund Jessop. 2020 999br>David Hume" '' Encyclopædia Britannica''. Retrieved 18 May 2020. was a Scottish Enlightenment ph ...

referred to it as "this new invention of paper".History of Monetary and Credit Theory
/ref> In 1705,

John Law John Law may refer to: Arts and entertainment * John Law (artist) (born 1958), American artist * John Law (comics), comic-book character created by Will Eisner * John Law (film director), Hong Kong film director * John Law (musician) (born 1961) ...

Scotland Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to ...

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 Bubble, Bubbles or The Bubble may refer to: Common uses * Bubble (physics), a globule of one substance in another, usually gas in a liquid ** Soap bubble * Economic bubble, a situation where asset prices are much higher than underlying fund ...

of speculation collapsing into extreme inflation; perhaps because he failed to take the lessons of the

Spanish Price Revolution The Price Revolution, sometimes known as the Spanish Price Revolution, was a series of economic events that occurred between the second half of the 15th century and the first half of the 17th century, and most specifically linked to the high rate o ...

seriously. In 1720,

Isaac Gervaise Gervaise wrote a prototypical examination of monetary theory in 1720 Isaac Gervaise (born ca. 1680 in Paris, died 1739) was an English merchant and economist. Gervaise was of a Huguenot family which fled to England in 1681. He was granted na ...

wrote '' The System or Theory of the Trade of the World''. He criticised

mercantilism Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce ...

and state-supported credit for the inflation problems of his era. ''

Della Moneta Della Moneta (On Money) is a book written by Ferdinando Galiani, and is considered one of the first specific treatises on economics, especially monetary theory, preceding Adam Smith's The Wealth of Nations by twenty-five years. Summary ''Della M ...

'', was published by

Ferdinando Galiani Ferdinando Galiani (2 December 1728, Chieti, Kingdom of Naples – 30 October 1787, Naples, Kingdom of Naples) was an Italian economist, a leading Italian figure of the Enlightenment. Friedrich Nietzsche referred to him as "a most fastidious and ...

in 1751, and is arguably the first modern text on economic theory. It was printed twenty-five years before

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...

's more famous book, ''

The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...

'', 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 On the Balance of Trade is an economic text on monetary economics that was written by David Hume and published in 1752. In the book, Hume examines various mistakes committed by nations regarding trade and suggests better alternatives. The thought ...

'' 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.

Notes

References

* ''Handbook of Monetary Economics'', Elsevier. : Friedman, Benjamin M., and Frank H. Hahn, ed., 1990. v. 1 links fo
description & contents
and chapter-outlin
previews
:_____, 1990. v. 2 links fo
description & contents
and chapter-outlin
previews.
:Friedman, Benjamin, and Michael Woodford, 2010. v. 3A & 3B links for
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.
Description
and 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 ''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is a twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Dictio ...

Online'', 2008. Abstract links for
"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 The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...

Working Papers: Links to JEL classes of abstracts or downloads fo
Macroeconomics and Monetary Economics
including:

: ttp://www.slideshare.net/BabasabPatil/money-credit-and-finance#btnNext Presentation of Money, credit and finance an slideshow:What is money? an slideshow http://www.slideshare.net/MitchGreen/lesson-1-what-is-money#btnNext {{DEFAULTSORT:Monetary Economics Macroeconomics

History

Research areas

History

Islamic Golden Age

1500s to 1700s

See also

Notes

References

External links