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 analy ...

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, store of value and unit of account), and it considers how money can gain acceptance purely because of its convenience as a

public good Public good may refer to: * Public good (economics), an economic good that is both non-excludable and non-rivalrous * The common good, outcomes that are beneficial for all or most members of a community See also * Digital public goods Digital pu ...

. The discipline has historically prefigured, and remains integrally linked to, macroeconomics. 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 ...

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 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. 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 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 Circulation (curren ...

, 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, 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 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 reductio ...

. * 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 directl ...

, 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 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 t ...

. * 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 very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often ...

as to the macroeconomy * Neutrality of money vs. money illusion 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 and fraudulent finance * Game theory 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 o ...

). 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 de ...

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, tran ...

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, exchange rates, 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 d ...

, 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, India ...

, Sher Shah Suri (1540–1545), introduced a silver coin called a ''rupiya'', weighing 178 grams. Its use was continued by the

Mughal Mughal or Moghul may refer to: Related to the Mughal Empire * Mughal Empire of South Asia between the 16th and 19th centuries * Mughal dynasty * Mughal emperors * Mughal people, a social group of Central and South Asia * Mughal architecture * Mug ...

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, 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 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 ...

in China 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 Turkme ...

. 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 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. ...

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 bord ...

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 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 phil ...

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

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 th ...

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 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 wrote ''

The System or Theory of the Trade of the World ''On the System or Theory of the Trade of the World'' is an immediate precursor to the first modern economic texts, written by Isaac Gervaise and published in 1720. Along with several other early economic texts, Gervaise was building on the effor ...

''. 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 ''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 Frank Horace Hahn FBA (26 April 1925 – 29 January 2013) was a British economist whose work focused on general equilibrium theory, monetary theory, Keynesian economics and critique of monetarism. A famous problem of economic theory, the co ...

, 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 Diction ...

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

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