Modern Monetary Economics Research Articles

Model Specification and Inflation Forecast Uncertainty in the Case of Pakistan

Making a better estimate of Inflation can enable us to make a better guesstimate about its economic repercussions. In modern monetary economics, the standard Phillips Curve model (PCM), the New Keynesian Phillips curve model (NPCM), and the incomplete competition model (ICM) are the alternative econometric models specified to forecast Inflation. The present study intends to identify the appropriate inflation model based on its forecasting performance with its different specifications for Pakistan's Economy. PCM includes the output gap and unemployment rate, NPCM has forward-looking expectations and uses labor income share instead of the output gap, and ICM identifies the importance of incomplete information on labor and product markets and uses some error correction term (ECT) to forecast Inflation. The relevant ECT has overcome the omitted variable bias. ICM is better in visualization forecasting and has lower root mean square error and mean absolute percentage error than other inflation models. In conclusion, the wage-price dynamics model (ICM) offers the best prospect of a successful inflation forecast in the case of Pakistan.

On Georg Simmel's Einleitung in die Moralwissenschaft: Preliminary Methods, Problems, and Concepts for a Critique of Modern Monetary Economics

The aim of this article is to expose some threads of continuity between Philosophie des Geldes and a less explored writing of Georg Simmel’s theoretical trajectory, namely: Einleitung in die Moralwissenschaft. To this end, I argue that in this early text Simmel proposes a psychological, sociological, and historical method to examine morality issues, which he later replicates in his approach regarding modern monetary economics. At the same time, I state that both works share resemblances in terms of the exposed topics: The opus magnum of 1900, like that early writing, gives great relevance to ethical issues. On this basis, I evidence the methodological affinity between these texts by comparing the Berliner’s treatment of moral duty, on the one hand, and economic value, on the other. Having done this, I explain how the thesis on the conflict of values delineated by young Simmel is then revisited in Philosophie des Geldes to account for the tension between economic value and the value of people.

Disequilibrium as the origin, originality, and challenges of Clower's microfoundations of monetary theory

Robert W. Clower's article “A Reconsideration of the Microfoundations of Monetary Theory” (1967) deeply influenced the course of modern monetary economics. On the one hand, it questioned Don Patinkin's (1956) project to integrate monetary and Walrasian value theory. On the other hand, it was the fountainhead of the cash-in-advance models à la Robert J. Lucas (1980), one of the most widely used approaches to monetary theory since the 1980s. Despite this influence, Clower's project to integrate monetary and value theory remains an enigma. My paper intends to resolve it. This is a difficult task since Clower never completed the monetary theory outlined in his 1967 article. To overcome this difficulty, I characterise the intellectual context from which Clower's contribution emerged and have recourse to a reconstruction of his project. This reconstruction is based on the analysis of published and unpublished materials, written by Clower before and after the 1967 article. It is argued that Clower sought to elaborate a disequilibrium monetary theory whilst retaining the two pillars of Patinkin's integration, i.e., the introduction of money into utility functions and the real-balance effect. I trace the origins, account for the originality, and discuss the challenges of this project.

Disequilibrium as the Origin, Originality, and Ambivalences of Clower's Microfoundations of Monetary Theory

Robert W. Clower’s article “A Reconsideration of the Microfoundations of Monetary Theory” (1967) deeply influenced the course of modern monetary economics. On the one hand, it revealed the deadlocks of Don Patinkin’s project to integrate monetary and Walrasian value theory. On the other hand, it was the fountainhead of the cash-in-advance models a la Robert J. Lucas (1980), one of the most widely used approaches to monetary theory since the 1980s. Despite this influence, there is no detailed study of Clower’s (1967) project to integrate monetary and value theory. My paper aims to fill this gap. This is a difficult task since Clower never completed the monetary theory outlined in his 1967 article. To overcome this difficulty, I characterize the intellectual context from which Clower’s (1967) contribution emerged and have recourse to a rational reconstruction of his project. This reconstruction is based on the analysis of published and unpublished materials, written by Clower before and after the 1967 article. Four conclusions are obtained. First, Clower (1967) intended to reorient Patinkin’s program to integrate monetary and value theory. Second, this reorientation was prompted by Clower’s (1965) influential search for disequilibrium microfoundations to Keynesian macroeconomics. Third, Clower’s (1967) project was to formulate a disequilibrium monetary theory. Fourth, such a project failed because of Clower’s (1965) approach to disequilibrium economics.

Post Keynesian Theory and Evidence of Money Supply Endogeneity: A Review Essay

Money is the life-blood of any modern market-oriented economy. The level of money supply - the quantity and velocity of money circulated in such an economy would determine its health. The central issue in managing the economy is to understand how money supply is determined. The history of modern monetary economics actually has witnessed the emergence of two opposing views pertaining to the role of central bank in controlling the supply of money in an economy. A group of economists, known as monetarists, under the influence of Milton Friedman, contended that money supply in an economy is exogenously determined. Post Keynesian however holds the view that money supply is endogenously rather than exogenously determined. Examining the theory of endogenous money as well as empirical work, the present paper has found that money supply in several countries is endogenously determined.

A Post Keynesian Perspective on the Rise of Central Bank Independence: A Dubious Success Story in Monetary Economics

This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.

Two-Sided Markets, Bank Card Payment Networks, and Public Policy

This policy brief reviews recent studies that have sought to apply analysis of network externalities and the theory of two-sided markets to card payment networks, and it evaluates the public policy implications of this body of work. Three general conclusions emerge from the bulk of the research to date. First, this industrial-organization focus on the roles of network externalities and market two-sidedness in shaping the card payment industry's pricing structure is likely to prove much more fruitful for analysis of relevant public policy issues than the alternative approach to payment economics offered in the modern monetary economics literature that emphasizes dynamic general equilibrium modeling of payment systems. Second, in light of the complex balancing act entailed in managing competing interests of card issuers, payment acquirers, cardholders, and retailers in the presence of network externalities, governmental regulation of card payment networks' fee structures is unlikely to yield welfare improvements and in fact could yield significant inefficiencies. Third, welfare-improving competition among card payment networks is best promoted by permitting card issuers, payment acquirers, cardholders, and retailers to participate in multiple card payment networks, suggesting that recent antitrust challenges of restrictive rules imposed by some card payment networks have been appropriate.

Response to Nelson and Schwartz

In responding to Nelson and Schwartz's [2008. The impact of Milton Friedman on modern monetary economics: setting the record straight on Paul Krugman's “Who was Milton Friedman?”. Journal of Monetary Economics 55, this issue] critique of my “Who Was Milton Friedman”, I focus on three central economic topics: (i) whether it is reasonable to claim that the Federal Reserve caused the Great Depression; (ii) whether monetary policy had the power to engineer an economic recovery after the onset of the depression; and (iii) whether monetarism succeeded or failed. On all these key points, I reject the criticisms of Nelson and Schwartz.

The impact of Milton Friedman on modern monetary economics: Setting the record straight on Paul Krugman's “Who was Milton Friedman?”

Paul Krugman's essay “Who Was Milton Friedman?” seriously mischaracterizes Friedman's economics and his legacy. In this paper, we provide a rejoinder to Krugman on these issues. In the course of setting the record straight, we provide a self-contained guide to Milton Friedman's impact on modern monetary economics and on today's central banks. We also refute the conclusions that Krugman draws about monetary policy from the experiences of the United States in the 1930s and of Japan in the 1990s.

The Impact of Milton Friedman on Modern Monetary Economics: Setting the Record Straight on Paul Krugman's 'Who Was Milton Friedman?'

Paul Krugman's essay Who Was Milton Friedman? seriously mischaracterizes Friedman's economics and his legacy. In this paper we provide a rejoinder to Krugman on these issues. In the course of setting the record straight, we provide a self-contained guide to Milton Friedman's impact on modern monetary economics and on today's central banks. We also refute the conclusions that Krugman draws about monetary policy from the experiences of the United States in the 1930s and of Japan in the 1990s.

Price rigidity and flexibility: recent theoretical developments

AbstractThe price system, the adjustment of prices to changes in market conditions, is the primary mechanism by which markets function and by which the three most basic questions get answered: what to produce, how much to produce and for whom to produce. To the behaviour of price and price system, therefore, have fundamental implications for many key issues in microeconomics and industrial organization, as well as in macroeconomics and monetary economics. In microeconomics, managerial economics, and industrial organization, economists focus on the price system efficiency. In macroeconomics and monetary economics, economists focus on the extent to which nominal prices fail to adjust to changes in market conditions. Nominal price rigidities play a particularly important role in modern monetary economics and in the conduct of monetary policy because of their ability to explain short‐run monetary non‐neutrality. The behaviour of prices, and in particular the extent of their rigidity and flexibility, therefore, is of central importance in economics. This introductory essay briefly summarizes the eight studies of price rigidity that are included in this special issue. Copyright © 2007 John Wiley & Sons, Ltd.

Microfoundations for a Stable Demand for Money Function

Scientific revolutions seldom occur when the prevailing theories appear to be performing well: it is only when the accepted theory fails to offer a satisfactory explanation of events that new and more robust theories are proposed. Of these new theories the one which can explain the successful performance of the previous theory and also the events which led to its demise becomes the replacement. So it is in the history of modern monetary economics. The failure of the partial adjustment model in the mid-I970s is well documented in the United Kingdom and the United States and the search for a replacement has been the main point on the agenda since that time. There are many contending theories, some of which are advocated by the other contributors to this controversy, but the mark of a truly better theory which can be claimed to supersede the partial adjustment model is one that can explain the success and the breakdown of the previous theory as well as the events subsequently. Central to the argument of this paper is the importance of individual behaviour in the context of a market for monetary assets. Only by means of careful investigation of the microeconomic behaviour underpinning monetary economics at the individual and the market level can the stability of the money demand function be restored. It is the purpose of this paper to suggest that the buffer stock approach has gone further than other approaches in dealing with the fundamental micro-foundations of the demand for money. It does not suggest that other approaches have no microfoundations but they tend to concentrate exclusively on specific aspects of the micro-structure such as separability and ignore others relating to the behaviour of individual optimisers in a monetary market. The buffer stock model has firm micro-foundations which can explain the events both before and after the breakdown of the partial adjustment model. Section I provides an historical background to the debate and Section II gives a brief overview of buffer stock models which shows that, unlike other approaches, they have been able to reconcile the past success of the partial adjustment model with its present failure: The nature of the microfoundations of buffer stock models are the source of the success and are discussed in more detail in Section III. The final section evaluates the buffer stock approach in the light of the other alternatives.

Money in Historical Perspective.

Modern monetary economics has been significantly influenced by the knowledge and insight brought to the field by the work of Anna J. Schwartz, an economist whose career has spanned almost half a century. Her contributions evidence a broad expertise in international history and policy, and an ability to apply the results of her careful historical research to current issues and debates. Money in Historical Perspective is a collection of sixteen of her papers selected by Michael D. Bordo and Milton Friedman. Grouped into three sections, the essays constitute a number of Dr. Schwartz's most cited articles on the subject of monetary economics, many of which are no longer readily accessible. In the papers in part I, dating from 1947 to the present, Dr. Schwartz examines money and banking in the United States and the United Kingdom from a historical perspective. Her investigation of the historical evidence linking economic instability to erratic monetary behavior this behavior itself a product of discretionary monetary policy has led her to argue for the importance of stable money, and her writings on these issues over the last two decades form part II. The volume concludes with four recent articles on international monetary arrangements, including Dr. Schwartz's well-known work on the gold standard. This volume of classic essays by Anna Schwartz will be a useful addition to the libraries of scholars and students for its exemplary historical research and commentary on monetary systems.