This is a textbook for students and practitioners alike. It intends to explain the theoretical background of monetary policy. It is based on the author’s German book “Geldtheorie und Geldpolitik.
Table of Contents
1 Fundamental Concepts
1.1 Money
1.1.1 Monetary Functions
1.1.2 Forms of money
1.1.3 Monetary Aggregates
1.2 Credit
1.2.1 Definition of credit
1.2.2 Forms of credit
1.2.3 The economic function of credit
1.3 Liquidity
2 Money supply
2.1 The central bank’s money supply and lending facilities
2.2 The commercial banking sector’s supply of book money and credit facilities
2.2.1 Introduction
2.2.2 Fundamental static analysis
2.2.3 Dynamic analysis
2.2.4 Base money and other monetary aggregates
2.2.5 More recent aspects of the money supply
3 Demand for money
3.1 Introduction
3.2 Classical/neoclassical money demand theory
3.2.1 The velocity approach
3.2.2 The cash-balance approach
3.3 The Keynesian liquidity preference theory
3.3.1 Introduction
3.3.2 Transaction-cash balances
3.3.3 Speculative-cash balances
3.3.4 The general demand function according to Keynes
3.4 Post-keynesian demand theories
3.4.1 The inventory theory approach
3.4.2 Portfolio selection theory
3.5 M. Friedman’s money demand theory
4 Monetary Euquilibrium and Transmission
4.1 Interest Formation and Transmission in classical/neoclassical Theory
4.2 The Keynesian Monetary Equilibrium Model and the Transmission Mechanism
4.2.1 Monetary Equilibrium and Interest Formation according to Keynes
4.2.2 The Transmission Mechanism
4.2.2.1 The Curve of Equilibria in the Money Market (LM Curve)
4.2.2.2 The LM Curve and Changes in Price Level
4.2.2.3 The Curve of Equilibrium in the Goods Market (IS Curve)
4.2.2.4 The IS Curve and Changes in the Price Level
4.2.2.5 Equilibrium in the Goods and Money Markets at Constant Price Level
4.2.2.5.1 Monetary Measures to Achieve Equilibrium at a Constant Price Level
4.2.2.5.2 Goods Market Measures to Achieve Equilibrium at a Constant Price Level
4.2.3 Summery of the Hitherto Results and Their Consequence for Economic Policy
4.3 Further Developments of the Classical Theory
4.3.1 Wicksell’s Processes
4.3.2 The Loanable Funds Theory
4.4 The Basic Concept of Monetarism and the Monetarist Transmission Process
4.4.1 The Basic Concept of Monetarism
4.4.2 The Monetarist Transmission Process
4.4.3 Some Comments on Monetarism
5 Changes in the Value of Money
5.1 Definitions
5.2 Measuring Changes in the Value of Money
5.3 Types of Inflation
5.4 The Monocausal Approach in the Theory of Inflation
5.4.1 The Classical/neo-classical Theory of Inflation
5.4.2 The Monetarist Theory of Inflation
5.5 The Multicausal Approach in the Theory of Inflation
5.5.1 Demand-pull Inflation
5.5.2 Supply-push Inflation
5.5.2.1 Cost-push Inflation
5.5.2.2 Profit-push Inflation
5.6 The Effects of Inflation
5.6.1 Effects on the Function of Money
5.6.2 Effects on International Competitiveness
5.6.3 Effects on Employment
5.6.4 Effects on Growth
5.6.5 Effects on Distribution
5.7 The Effects of Deflation
Objectives and Topics
The primary objective of this work is to provide an introduction to monetary theory, covering the mechanics of money supply, the demand for money, and the role of monetary policy. The work examines various theoretical frameworks—from classical and Keynesian to monetarist—to analyze how interest rates and the value of money are determined and how they influence the broader economy.
- Mechanisms of money creation and the role of central banks.
- Theories of money demand (Classical, Keynesian, and Post-Keynesian approaches).
- Monetary equilibrium and transmission mechanisms in goods and money markets.
- Analysis of inflation and deflation, including causes, types, and economic consequences.
Excerpt from the book
1.1 Money
When we speak about the money in an economy, we assume that this means its legal tender. Money is thus “a creature of law” as Georg Friedrich Knapp put it in “Die Staatliche Theorie des Geldes” (The State Theory of Money).
By contrast, John Locke took the view that the emergence and value of money are attributable to an agreement (convention) between people.
The opinion that money is created and has its value assigned by law is termed nominalist theory, whilst the view that money comes into being through an agreement between people is called conventionalist monetary theory.
However, in times of crisis it becomes clear that the money created by the state by law is able to perform important economic functions, such as serving as a medium of exchange or a store of value, only to a limited extent.
Summary of Chapters
Fundamental Concepts: This chapter introduces the basic definitions of money, credit, and liquidity, setting the stage for understanding their roles within an economy.
Money supply: This chapter analyzes how money is created by central banks and commercial banks, including the constraints they face in the supply process.
Demand for money: This chapter explores why economic agents hold money, detailing classical, Keynesian, and post-Keynesian theories on money demand.
Monetary Euquilibrium and Transmission: This chapter discusses how monetary stimuli are transmitted to the goods market, examining the interplay between money and goods market equilibrium.
Changes in the Value of Money: This chapter investigates inflation and deflation, focusing on their definitions, measurement, causes, and impacts on the economy.
Keywords
Monetary Theory, Money Supply, Central Bank, Monetary Policy, Money Demand, Liquidity, Inflation, Deflation, Transmission Mechanism, Keynesian Theory, Monetarism, Credit Creation, Price Stability, Nominal Income, Asset Structure
Frequently Asked Questions
What is the primary focus of this publication?
The book provides a comprehensive introduction to monetary theory, specifically focusing on how money is supplied, why it is demanded by economic agents, and how it impacts the broader economy through various transmission mechanisms.
What are the key thematic areas covered?
The book covers the functions and forms of money, the role of central banks and commercial banking, theories of money demand, the relationship between interest rates and economic output, and the causes and effects of inflation and deflation.
What is the primary research question or objective?
The objective is to explain the fundamental theoretical components of monetary systems, specifically illustrating how issuers make money available and the constraints faced in the process, while relating these to macroeconomic objectives like price stability.
Which scientific methods are applied?
The work utilizes structural analysis of banking systems, formal definitions and model building (e.g., identity and behavioral equations for money supply and demand), and comparative analysis of major economic theories (Classical, Keynesian, Monetarist).
What is addressed in the main body?
The main body systematically progresses from fundamental concepts of money and credit to the mechanics of money supply, demand theories (including liquidity preference and inventory-theoretic approaches), and eventually to the transmission of monetary policy and the analysis of inflation/deflation.
How is this work characterized by its keywords?
The work is grounded in standard macroeconomic concepts such as liquidity, money aggregates, interest rate formation, and price stability, while bridging historic economic thought with modern Eurosystem policy frameworks.
How does the author explain the "liquidity trap"?
The author defines the liquidity trap as a situation where, at extremely low interest rates, economic agents expect interest rates to rise and thus prefer holding money over investing, rendering monetary policy ineffective at increasing national income.
What is the distinction between primary and secondary assets according to the author?
The author classifies central bank asset purchases as primary assets if the commercial bank has no future liability, and as secondary assets when they involve a loan that requires repayment, leading to the destruction of money upon maturity.
- Arbeit zitieren
- Rudolf Peto (Autor:in), 2014, An Introduction to Monetary Theory, München, GRIN Verlag, https://www.grin.com/document/276638
