Modern Monetary Research Articles

The Triumph of Keynes: What Now for Monetary Policy Research?

:This paper argues that De Long’s (2000) announcement of “the triumph of monetarism” is misplaced on the grounds that the cornerstone of monetarism–the quantity theory of money–is no longer used by central banks in practice. Instead, modern monetary policy is based on maintaining aggregate demand growth that is compatible with supply-side capacity growth, a framework that can be traced to chapter 21 of Keynes’s (1936) General Theory. This paper discusses the implications for future monetary policy research, paying particular attention to how the “output gap” should be interpreted in explaining inflationary trends.

Monetary Policy and the Zero Bound to Interest Rates: A Review

This paper reviews the literature on what the zero bound to nominal interest rates implies for the conduct of monetary policy. The aim is to evaluate the risks of hitting the zero bound; and to evaluate policies that are said to be able to reduce that risk, or policies that are proposed as means of helping the economy escape if it is in a zero bound 'trap'. I conclude that policies aimed at 'cure' are arguably more uncertain tools than those aimed at 'prevention', so prevention is a less risky strategy for policymakers. But since the risks of hitting the zero bound seem quite small anyway, and the risks of encountering a deflationary spiral smaller still, it is conceivable that inflation objectives that typify modern monetary regimes already have more than enough insurance built into them to deal with the zero bound problem.

The Perils of Base Money

Insecure linkage of ordinary money to fractional reserves of a distinct base money can sometimes endanger the smooth working of modern monetary systems. This danger applies most obviously to the analogous insecure pegging of domestic to foreign currency. Worry would better focus, however, not on the size of reserve ratios but on the very existence of something distinct to which ordinary money is linked. In the modern world money is a device for monitoring transactions, keeping records, calculating economic bene- fits and costs, and accomplishing multilateral clearing. Money enables people conveniently to use the entitlements acquired by delivering goods and services and securities to some trading partners to obtain others of these from other trading partners. The tickets and memoranda employed in these operations need not take the form of little disks of precious metal or even of certificates convertible into them or some other kind of ultimate base money. It would be economically advantageous and feasible to make all money "inside money" (in the sense of Gurley and Shaw), with the value of the money unit determined and maintained otherwise than through convertibility into a distinct base money, which would have been abolished.

Hume's specie-flow mechanism and classical monetary theory: An alternative interpretation

Hume's celebrated essay on the international distribution of money has always been criticized for ignoring the law of one price. Contrary to the traditional interpretation, however, Hume actually maintains that law and argues for the stability of long-run equilibrium. Putting money market equilibrium in the foreground, his analysis is essentially founded on the same hypothesis as the modern monetary approach, albeit focusing on the supply rather than on the demand side of the money market.

Money and the nation state: the financial revolution, government and the world monetary system

Monetary and banking problems in world today arise not so much from failure of specific policies as from more deep-seated problems in institutional structures. Individuals clearly make mistakes and legislatures make bad laws, but institutions from which decisions and laws emanate determine effectiveness of social operations and value of social decisions. Unless we change present institutional structure, we are not likely to get stable solutions to today's most serious problems--ongoing and often erratic inflation and serious banking instability. Money and Nation State examines history of modern monetary and banking arrangements, some of major monetary and banking problems, and options for meaningful reform. The common theme of all essays is that current arrangements result less from accomplishments of great men than man-made institutions that society has inherited--central banks and the legal and regulatory frameworks that accompany them. The contributors emphasize impact of political interference on workings of monetary and financial institutions. Not surprisingly, they find many problems arise because politically generated structures are inappropriate to real needs of individuals and groups they are meant to serve. Money and Nation State provides an essential framework for those willing to return to first principles in thinking about role of monetary institutions in economic life. Economists, financial theorists, and interested citizen will find it stimulating reading.

Expectations and Monetary Neutrality: An Empirical Reexamination

Modern monetary business cycle models feature rational expectations and natural rate assumptions which imply that unanticipated changes in nominal aggregates affect real output, but anticipated changes do not. Initial tests conducted by Barro [3] and by Barro and Rush [4] supported the neutrality of anticipated money growth. In a particularly influential study, Mishkin [21; 22] rejected the neutrality of anticipated policy. Mishkin's paper [21] has become one of the most frequently cited studies in empirical macroeconomics. The influence of the study probably derives in large part from the unequivocal nature of the results. In particular, Mishkin showed that i) the hypothesis that anticipated policy has no effect on output is strongly rejected; ii) anticipated nominal changes have a greater estimated effect on output than do unanticipated nominal changes; iii) lags as long as 17 quarters have significant coefficients, implying that Barro's eight-lag model was underspecified; iv) in some specifications, the estimated sign of the effect of nominal innovations is opposite to the prediction of monetary business cycle theory. Frydman and Rappoport [9] used Mishkin's empirical model to provide further evidence against the neutrality hypothesis by showing that the data provide no evidence for distinguishing between the output effects of anticipated policy and those of unanticipated policy. Although several subsequent studies have supported the neutrality hypothesis [7; 12], Mishkin's careful study and a small number of additional studies suggest that the neutrality hypothesis is not robust. The empirical rejection of the neutrality hypothesis contradicts a wide range of modern monetary models, including those based on imperfect information [14; 18; 19], and those based on imperfect competition [8; 20].' As a consequence, the focus of macroeconomists has in recent years shifted to non-monetary models in which money responds passively to changes in aggregate output [16; 17]. This paper explores the robustness of Mishkin's results using an updated data set. The model yields results that are more consistent with the neutrality hypothesis than those of Mishkin. In par-

Ludwig von Mises's monetary theory in light of modern monetary thought

Ludwig von Mises's monetary theory in light of modern monetary thought

Modern Monetary Theory: A Critical Survey of Recent Developments.

In the aftermath of the debates between Keynesians and monetarists, this book aims to provide a concise overview of the most recent developments in monetary theory. Professor Visser has written an up-to-date survey which discusses major issues such as crowding out, the new classical macroeconomics, the breakdown of the stable money demand function, buffer stocks and currency substitution. Currency problems in general have come to the fore after the collapse of the Bretton-Woods system. The book addresses topical issues such as Hayek's proposal to denationalize money as well as theoretical issues such as the search for the microfoundations of monetary theory. This is an important, up-to-date survey of recent developments in monetary theory and the economic reasoning which underlies it. The use of mathematics has been kept to a minimum.

Modern monetary theory: a critical survey of recent developments

Modern monetary theory: a critical survey of recent developments

Alice in wonderland or malice in blunderland?

The date is 1 January of the year 2003. Ten years ago the Single European Market was completed in the Europe of the Twelve. As a birthday present, we are witnessing today the inauguration of a Eurofed and the baptism of a single European currency: the franc fort. Guess where we are celebrating. At the ultimately determined seat of the Eurofed—Frankfurt. After a decade of haggling and bargaining, the suggestion of the German Bundesbank, that Frankfurt is the natural location, has apparently hit home with Germany's European partners. On the winding and stormy road to this single currency, the EC was confronted with several serious problems: while in the course of the 1990s the EC had managed to reach considerable common ground in the area of economic and monetary policy (largely due to the anchor function of the Deutschmark), in the wake of German unification the Deutschmark softened and lost some of its dominance, and thus endangered monetary stability. In addition, the enlargement of the Community increased economic divergence and required that 20 national currencies had to be managed and merged. However, the Swedish President of the EC Commission, a crusader for economic and monetary union (EMU), managed to get a compromise accepted, encompassing both rather tight rules on national public spending and borrowing and a handsome amount of money to be given to the weaker member states, to alleviate the inevitable macroeconomic adjustment shock. But the good old days will not be forgotten. In a prominent place of the Luxembourg Museum of Modern Monetary History stands a glass case containing coins and bills of the former national currencies, as well as some accounting documents which were used for dealing with the predecessor of the franc fort, the European Currency Unit (ECU). Unfortunately, the ECU never really lived up to expectations that it would become a single European currency. Let us slip back now for a moment to the year 1991 in order to see how the EMU concept was born and how its progenitors fought with each other about what it should become.

Rules, commitment, and the search for stable money: A review essay

Political economists have always criticized existing monetary institutions and struggled to articulate a vision of an ideal monetary system. The volume under review, The Search for Stable Money: Essays on Monetary Reform, edited by James A. Dorn and Anna J. Schwartz (University of Chicago Press, 1987), stands firmly in this tradition; it addresses the shortcomings of modern monetary institutions and debates the merits of various alternative arrangements. The volume consists of nineteen essays and a number of short comments. Among the contributors are three Nobel prize winners (Buchanan, Friedman, and Hayekthough Buchanan simply comments on Bernholz). Generally speaking, the essayists disapprove of the virtually unlimited discretion invested in the Federal Reserve: they argue that discretion leads to unnecessarily high and variable rates of inflation. The essayists also agree that the solution ought to take the form of a change in the political rules which would have the effect of limiting government control over the monetary system, Beyond this there is no consensus. The contributors consider money growth rules, the gold standard, a proposal for a compensated dollar, and competitive currency systems, but often find one another's proposals as objectionable as the status quo. The essays in this volume are about five years old; with the exception of the introductory piece by James Dorn, each was originally published elsewhere. Most originally appeared in the Cato Journal in 1983. Sometimes the age of the essays shows. Careful analysis of Federal Reserve policy in 1981-82 was no doubt of topical interest when the essays were written, but is less so now.

Modern Monetary Theory.

Modern Monetary Theory.

Financial Aspects of Korea's Economic Growth under Japanese Rule

Feeling strong pressure from Western Powers Japan abandoned her seclusion policy in 1854 and inaugurated serious efforts to modernize her society and economy after the Meiji Restoration in 1868. She, in turn, forced Korea who had been keeping the seclusion policy on her own to open the door in 1876. The feudal Korean government (the Yi Dynasty, 1392–1910) was impelled to embark on social and economic reforms by opening the door. Yet, after nearly thirty years’ struggle to make reforms and to secure the independence of the country, Korea was converted into a protectorate of Japan in 1905 and was officially annexed to her in 1910. The Japanese government recognized that the creation of modern monetary and banking systems in Korea was the precondition for trade expansion between the two countries (for Japan, rice imports on the one hand and textile exports on the other) and thus started its colonial rule over Korea by establishing a central bank, development banks and financial cooperatives. This paper aims at setting forth an analysis of a more or less unexplored field in the study of the economic history of Korea, that is, the financial aspects of her economic growth under Japanese rule. Particularly, emphasis will be placed on quantitative analysis of major financial variables represented by money, interest rates and bank credit. Before proceeding to the main subject, it may well serve to review some of the financial problems in the late Yi Dynasty period.

When are expectations rational? Some vexing questions and behavioral clues

Modern monetary policy focuses on credibility and shaping inflation expectations. In keeping with the concept of inflation forecast targeting, the inflation forecasts published by central banks play a crucial role in the instrument rate decision-making process and may be treated as a specific intermediate target. This study proposes an inflation forecast credibility index, the scope of which is narrowed to non-specialists’ approach to inflation forecasts. The credibility of the forecast is defined as the ability to shape consumers’ inflation expectations. This ability is measured as the absolute difference between the central paths of inflation forecasts (the mode values) in the one-year forecast horizon and one-year consumers’ inflation expectations. The inflation forecast is represented in the study as a function of forecast attributes (accuracy, similarity, and deviation from the inflation target). The credibility function of the forecast is derived from belief function theory, normally distributed, and determined by the linear function of the chosen forecast attributes. The importance of these attributes depends on whether monetary policy was conducted before or after reaching the zero lower bound on the policy rate. The credibility index is calculated for the inflation forecasts published by the central banks of the United Kingdom and Sweden. The main conclusion of the study is that the deviations of the forecast in the last year of the forecast horizon and similarity between consecutive forecasts are important forecast attributes for shaping the inflation expectations of consumers before and after reaching the zero lower bound on the policy rate, and may determine the inflation forecast's credibility. However, the similarity to consecutive forecasts affects the forecast's credibility in opposite ways before and after reaching the zero lower bound on the policy rate.

The Evolution of Financial Institutions and the Ineffectiveness of Modern Monetary Policy

The Evolution of Financial Institutions and the Ineffectiveness of Modern Monetary Policy

The Humean Origin of the Contemporary Monetary Approach to the Balance of Payments

I. Introduction, 655.—II. The essence of the modern monetary approach, 657.—III. The price-specie-flow mechanism of David Hume, 663.—IV. Concluding observations, 668.

THE MONETARY THEORETIC FOUNDATION OF THE MODERN MONETARY APPROACH TO THE BALANCE OF PAYMENTS

Journal Article THE MONETARY THEORETIC FOUNDATION OF THE MODERN MONETARY APPROACH TO THE BALANCE OF PAYMENTS Get access S. C. TSIANG S. C. TSIANG Cornell University and Nuffield CollegeOxford Search for other works by this author on: Oxford Academic Google Scholar Oxford Economic Papers, Volume 29, Issue 3, November 1977, Pages 319–339, https://doi.org/10.1093/oxfordjournals.oep.a041373 Published: 01 November 1977

Commodity Theories of the Acceptability of Money

The medium of payment typically is defined as that which is generally accepted in payment for goods and services or in the settlement of debt. Perhaps because modern monetary systems function so well in providing media of payment, we seldom consider the question of why they enjoy the general acceptability by which they are identified. Yet, because monetary systems evolve and change, such basic questions warrant occasional re-examination to ensure that contemporary analysis does not, unwittingly, embody and foster the errors of an earlier time.

Thomas Jefferson on Money and Banking: Disciple of David Hume and Forerunner of Some Modern Monetary Views

Thomas Jefferson on Money and Banking: Disciple of David Hume and Forerunner of Some Modern Monetary Views

Some Mathematical Notes on the Quantity Theory of Money in an Open Economy

THE RELATION between the quantity of money and the level of prices and incomes is generally treated by modern monetary theorists in terms of a "closed" economy, that is, without allowing for international trade as an integral part of the theory. In his "Monetary Analysis of Income Formation and Payments Problems,"1 J. J. Polak has shown how the existence of international trade, and the consequent possibility of balance of payments deficits, modifies in an essential way the theoretical analysis of the monetary system. The central element in his theory is that a given deficit in the balance of payments has cumulative effects on the monetary supply: it directly reduces the quantity of money until the consequent income and import changes are of sufficient size to correct the initial disequilibrium. The phenomenon is thus part of economic dynamics; that is, it relates the present state of certain economic variables to the rate of change of those and other variables. The use of mathematics seems to be unavoidable in analysis of this kind; indeed, the use of several alternative mathematical representations is occasionally of value in bringing out the specific role of the various relationships in the system. The first part of this paper reformulates Polak's system in terms of infinitesimal and continuous changes, thus replacing his difference equation by a differential equation. As a consequence, certain relations affecting liquidity that were implicit in his modelin the sense that they influenced movements within each period-have necessarily to be made explicit, so casting further light on the essential elements of the adjustment process. This generalization also allows another version of the model, of the kind used in the work of the Netherlands Bank, to be treated as a special case.