Monetary Theory Research Articles

Production Structures and Fluctuations in the Money Supply: An Analysis Based on Marx’s Concept of Set-Free Money Capital

In chapter 15 of volume 2 of Capital, Marx introduced the concept of set-free money capital during the turnover process of industrial capital, positing its role in the credit system. Saros further formalized this process, suggesting that set-free money capital could serve as loanable funds, impacting the credit system. This article advances this research by making three significant contributions. Firstly, it offers a more succinct formalization of the turnover process, improving pedagogical clarity. Secondly, it reinterprets the significance of set-free money capital within the modern credit money system using post-Keynesian endogenous money theory, linking production directly to the money supply. Lastly, it demonstrates through simulations that production structure influences the periodic fluctuations of set-free money capital at the macro level, affecting the money supply. JEL Classification: B51, E32, E51

Not all money is created equal: The concept of a hierarchy of money

Abstract The concept of a hierarchy of money or the idea that a number of instruments constitute money and that they are hierarchically related to one another is relatively recent and yet quite widespread. However, it is argued, that its comprehension differs. The most elaborated cases in which differing treatments of the term can be found are Modern Money Theory (MMT) and the Money View. At first sight, the MMT’s model of money hierarchy focuses on a hierarchy within a specific unit of account whereas the Money View perceives hierarchy not only within an individual unit of account but also across various units of accounts. But, as is shown, differences are more fundamental. It is argued that different comprehension can be explained by the different distinctions between money and credit and concept of monetary sovereignty within each approach rather than the concept of hierarchy itself. The concept of hierarchy acts, in fact, as a framework that ensures consistency in the use of different money instruments on those level.

Analysis of the Mechanisms Behind the "China Money Mystery"

The growth rate of China's broad money supply (M2) significantly exceeds the combined rates of economic growth and inflation, leading to a continuous rise in the ratio of M2 to GDP. This phenomenon is referred to as the "China Money Mystery." The explanation for this phenomenon involves several factors. Firstly, interest rate and exchange rate controls in the financial market lead to excessive increases in money demand. Secondly, financial repression results in excessive use of indirect financing and a lack of investment channels, further distorting money supply. Thirdly, the financial hoarding theory suggests that a large amount of money flows in the virtual economy rather than being invested in the real economy, thus failing to induce noticeable inflation. Finally, the applicability of traditional quantity theory of money in the modern credit money system is gradually diminishing, failing to explain the relationship between money supply and prices. By integrating these factors, a better understanding of the abnormal monetary supply phenomenon in China and its implications can be achieved.

Negentropy approach to justification of the essence of money

Тhe article discusses existing theories of money, their advantages and disadvantages. The commonalities and differences in existing theories of money are revealed. The author's classification of theories of money is given. The concept of negentropy is substantiated as the methodological basis of the negentropic approach to substantiating the essence of money. The objective negentropic nature of money as a commodity is revealed. The subjective nature of money based on trust is shown. The essence of money as a universal equivalent of the stock of negentropy is revealed. An explanation of the functions of money is given from the point of view of the negentropy approach. Inflation is considered as a manifestation of the entropy of money itself. The laws of monetary circulation are explained from the point of view of the negentropy approach. Existing theories of money are considered as special cases of negentropy theory. Recommendations are given for regulating money circulation, taking into account the negentropic nature of money.

The Influence of Monetary Economy on The Value of Indonesia's Trade Balance in 2021-2023

The Influence of Monetary Economy on The Value of Indonesia's Trade Balance in 2021-2023

Credibility of central banks in monetary economies

This paper develops a model of money to study interventions by a central bank that can monitor the money holdings of agents. I show that an off-the-equilibrium intervention enhances the use of money and stabilizes its values.

The Monetary Model of Exchange Rate Determination for South Africa

The disconnect between the exchange rate and its macroeconomic fundamentals has been extensively discussed in the literature. It nonetheless continues to pose theoretical and empirical challenges in the literature. This study examines the relationship between the exchange rate and its fundamentals. This study used the monetary model of exchange rate determination developed in the 1970s. The study used the TAR to estimate the exchange change rate behaviour in response to variations in monetary variables. We found that the exchange rates respond to the interest rate differential, consistent with the predictions of the monetary model of exchange rate determination. Furthermore, in all the regimes, the sizes of coefficients are different, which shows that the exchange rate behaviour is non-linear (asymmetric). While the impact of the interest rate differential in regime 1 and 2 leads to exchange rates appreciating although in regime 2 the results are insignificant, this occurs when the exchange rates fluctuate below 0.87 percentage points. In regime 3, on average, a marginal increase in interest rate deferential leads to an exchange rate depreciation. In some instances, the exchange rates respond to the monetary variables’ changes in line with the predictions of the monetary theory of exchange rate determination. An increase in interest rates in some instances leads to an improvement in the value of the exchange rate. However, the conditions are not constant—they vary depending on the state of exchange rate fluctuation.

Analysis of an Optimal Short-Term Inflation Rate Forecasting Model in Kenya Case of SARIMA Modelling

Purpose: Inflation has soared to multi decade highs prompting rapid monetary policy tightening and squeezing household budgets. Combining several techniques of forecasting is an instinctual way to improve prediction performance as the limitations of one method are compensated by the strength of the other model. It is real that uncertainty over future inflation forecasting has caused detrimental and negative impact not only globally but also in the Kenyan economy. The general objective of the study was to develop an optimal model of forecasting short term inflation rate in Kenya. The specific objectives were to establish models of forecasting short term inflation rate using SARIMA, GARCH and hybrid SARIMA-GARCH family Models. Select an optimal model amongst the three models. Predict 12 months ahead inflation rate using the optimal model. Scope of the study covered was 2005m1 to 2024m4.This study was anchored on monetary theory of inflation, Keynesian theory of inflation as well as rationale expectation theory of inflation. Data was sourced from KNBS, CPI monthly from January 2005 to April 2024. Methodology: The study was guided by positive research design philosophy. Explanatory research design was used in this study. Target population was 230 monthly observations in Kenya from January 2005 to April 2024.PACF and ACF were used to check autocorrelation in the data. Diagnostic checks The Ljung-Box test (LL) and Q2 indicated non-significant autocorrelation p- value were greater than 05% indicating that the models residuals were white noise. Findings: The DOF/GED parameter (4.144466*, 1.101958, 6.977499) represented the degrees of freedom for the t-distribution and the coefficients where significant at 0.05% meaning the model's assumptions for normal distributions were met. The following models SARIMA (1,0,1)(2,1,0)12 (Aic133.99), GARCH (1, 1) model ( aic 1.63). Hybrid, SARIMA((1,0,1),(2,1,0)) gjrGARCH(1,1) model(aic 1.34) were identified and estimated. Implication of these results were that in terms of the aic hybrid SARIMA gjrGARCH model had the lowest (aic 1.33) and was chosen as the optimal model for forecasting Kenya’s inflation rate amongst the three models. The coefficients of AR Normal 0.048140, T-Student −0.031854, GED −0.02396 and MA Normal 0.055167, T-Student 0.059645, GED 0.051390 terms were significant at 5%. The results implied that the model predicted a decrease in the Kenya’s inflation rate for the next 12 months. In terms of forecast accuracy the lowest (RMSE) and (MAE) criterion the optimal model for forecasting short term inflation rate in Kenya was hybrid SARIMA((1,0,1),(2,1,0)) gjrGARCH(1,1) with lowest coefficient (MAE) of 11.45 and (RMSE) of 12.84. The study recommended that inflation rate would be hovering below an average rate of 10 within the next 12 months up to April 2025 and policy makers should use this prediction for planning in order to maintain Kenya’s macroeconomic stability. Unique Contribution to Theory, Practice and Policy: Policy makers were also advised to use the hybrid model to forecast short term inflation rate 12 months ahead in future years. The benefits of the study was added knowledge of hybridizing (methodological) to researchers and theoretical to policy makers.

A Franciscan Monetary Theory? Alexander Bonini and the Forms of Money at the End of the Middle Ages

ABSTRACT During the commercial revolution of the Middle Ages, the monetisation of economy gave rise to a series of cultural, legal and social challenges to the commonly accepted Aristotelian background. In this dynamic context, new forms of trade and contracts emerged, affecting not only commercial doctrines but also financial theories. In this framework, Franciscan economic speculation played a major role by analysing social realities with an entirely original pragmatism. Through his monetary reflection, Alexander Bonini not only gave a surprising explanation of the ‘forms of money’ but also praised the activity of the money-changers, considering their service (and related costs) fundamental to the realisation of a common benefit. His thought-provoking synthesis introduced many themes of the modern monetary doctrines. The article contains the first English translation of some crucial passages of the Bonini’s treatise On Usury (De Usuris).

Analysis of the Causal Relationship between Money Supply, Foreign Reserves and Bank Credit in Oil Countries: Evidence from Iraq

This study investigates the causal relationships among money supply, foreign reserves, and bank credit in Iraq, a major oil-producing economy. Understanding these interconnected variables is crucial for effective monetary policy formulation and macroeconomic stability. this study employs the Toda-Yamamoto approach to Granger causality testing and quarterly data spanning from 2004 to 2022 to capture the dynamics following the Iraq War and explore the post-conflict economic landscape. Granger causality tests are conducted to determine the direction of causality among the variables. Impulse response functions and variance decompositions provide insights into the magnitude and persistence of shocks, shedding light on the relative importance of each variable in influencing the others. The empirical findings reveal a bidirectional causal relationship between money supply and foreign reserves, indicating that changes in one variable significantly influence the other. Additionally, a unidirectional causality is observed, running from foreign reserves to bank credit, highlighting the significance of foreign exchange reserves in facilitating bank lending. However, no causal link is detected between money supply and bank credit, suggesting that monetary policy may have limited direct impact on credit expansion in Iraq’s banking sector. These results have important policy implications for the Central Bank of Iraq in managing monetary policy tools and navigating the challenges of an oil-dependent economy. The study contributes to the literature on monetary economics in resource-rich countries and provides valuable insights for policymakers and researchers alike.

Is CBDC undermining the Process of Money Creation?

ABSTRACT Several policymakers and academic works have been discussing the nature of Central Bank Digital Currency (CBDC) as well as its debated relationship with crypto-assets. CBDC would allow the private (non-financial) sector to access the central bank’s reserves. Given its superior hierarchy in the money spectrum, CBDC adoption could trigger a strong or mild conversion from deposits, depending on its design, with strong impacts on the assets and liabilities composition and magnitude of different actors. The aim of this paper is to study the dynamics related to the transmigration process from deposits to CBDC as well as the process of money creation through a detailed step-by-step analysis, tracking the transactions between the institutions involved in its adoption. It underlines the validity of the endogenous money theory (EMT) in describing those transactions while clarifying the maintenance of the commercial banks’ vital role in the process of money creation, in a world with the emergence of CBDC.

Monetary sovereignty and the ‘Invisible Leviathan’: the politics of Marx’s theory of money

A debate has recently emerged in Heterodox Economics and Political Economy on the nature of monetary sovereignty, and whether it can be democratised and wielded to address the social and environmental catastrophes of our age. While Modern Monetary Theory understands monetary sovereignty to be relatively unconstrained, post-Keynesian, Structuralist and Critical Macro-Finance approaches point to various external limits on states’ abilities to govern money – from the international currency hierarchy to the offshore nature of money creation. This article evaluates this debate in light of Marx’s monetary theory. Under capitalism, money constitutes the social adhesive of a world of privatised production and mass dispossession, which conjures an anonymous, competitive logic that Marx terms the ‘law of value’. To function in this way, money must be underpinned by an historically novel form of state sovereignty. The state must both back money with its coercive powers and insulate monetary governance from popular forces, or else risk losing the confidence of the profit-driven private actors upon which money relies. Yet in exercising its sovereign capacity to govern domestic and international money relations, the state inadvertently reproduces the law of value on a global scale – an ‘Invisible Leviathan’ that subordinates states to its dictates. Contra the Heterodox literature, then, monetary sovereignty is not a vehicle for radical democracy or social/environmental justice, nor is it simply constrained by external limits. Instead, monetary sovereignty is innately a practice of depoliticisation that unwittingly produces a global logic of economic domination that binds states’ hands.

The Relationship Between Financial Markets and Monetary Economics

The Relationship Between Financial Markets and Monetary Economics

Finansjeryzacja lokalności i kulturowe spojrzenie na pieniądz finansowy

Financialization is “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production”. The expansion of the financial sector is enabled by a credit money mechanism that takes on a fictitious character. As a result, financialization leads to the reproduction of social inequality and the subordination of individual behavior to the logic of financial markets. According to critics of the process, local culture is being destroyed by credit money. In this paper, the author points to the social basis of financialization by demonstrating the ways in which local communities produce money – personalizing it and creating its meaning based on debt relationships. He illustrates the influence of culture on money using the example of microfinance and its criticism. Finally, the author proposes a different perspective on financialization, which – by combining the mutual influence of culture and money – allows for changing the categories of thinking about contemporary sources of locality and the divide between the global and the local. Key-words: financialization, microfinance, money theory, credit money, debt relationships, local communities

Money and Its Body in the Social Positioning and Credit Perspectives: Review Article of Samuel A. Chambers’ Money has No Value

Abstract A new and distinctive version of the credit theory of money is advanced by Samuel A. Chambers in his book Money Has No Value. The account of money sponsored by social positioning theory is an alternative perspective against which Chambers’ new credit theory can be productively compared. This review article draws out the differences between these competing theories of the nature of money. An examination of Chambers’ brief, largely dismissive, remarks on social positioning theory reveals a flawed conception of it. The social positioning theory of money is shown to be a coherent and explanatorily powerful account that is worthy of consideration alongside even the updated version of the credit theory supplied by Chambers.

The Impact of Investor Expectation on the Financial Decision-Making

This paper delves into a fundamental analysis of two significant standards in budgetary financial matters: efficient market hypothesis and behavioral finance. The efficient market hypothesis posits that financial markets efficiently process all available information, leading market participants to make rational decisions. This theory underscores the accuracy of market predictions and the efficiency of information processing. In contrast, behavioral finance challenges the efficient markets theory by revealing various cognitive biases and irrational behaviors that influence financial decisions, casting doubt on the accuracy of market predictions and the rationality of market behavior. Through a comprehensive investigation, this article aims to compare these two hypotheses and evaluate their impact on understanding financial markets and decision-making processes. By providing insights into how market efficiency and behavioral inconsistencies coexist and influence financial practice, this article aims to contribute to the ongoing discourse in monetary economics. By delving into these contrasting theories, this paper aims to provide valuable insights into how market efficiency and behavioral factors interact and shape financial outcomes.

A bankszabályozás lehetőségei és korlátai az endogén pénzelmélet keretében

The article questions whether the current system of bank regulation can guarantee that banks are subject to a hard budget constraint. We use the framework of post-­Keynesian endogenous money theory. Banks deposit loans in companies’ bank accounts, and no external source is needed for the transaction, so banks can in principle create an unlimited amount of money if there is a demand for credit. However, banks’ ability to create money is limited by a number of factors. Using János Kornai’s concept of a soft budget constraint we analyze the factors that cause inherently soft budget constraints for banks. We point out that neither monetary policy, nor the profit goals of banks, nor the banks’ internal risk management practices would guarantee that banks face a hard budget constraint. This must be imposed on them by an external factor, the banking regulation. However, the current system of banking regulation is not well suited to do this, so the soft budget constraint is inherent to banking. This contributes to the fact that banking crises are natural part of the financial system.

Impact of Money Supply and Inflation on Economic Growth

Understanding the impact of money supply and inflation on Nepal's economic development is the main objective of the current study. This work aims to give empirical backing to the current debate over money supply, inflation, and the relationship between these factors and economic growth. More research has been done recently on the relationship between money supply and economic growth than on any other topic in the field of monetary economics. A price increase that, over time, results in a decline in buying power is known as inflation. This study looks at how inflation and the money supply affected economic development between 1974–1975 and 2022–2023. When establishing if there is long-term co-integration among variables when the bound test has been applied, the ARDL co-integration approach is employed in the study to ascertain the link between the variables. GDP is the dependent variable, and the independent variables are broad money (M2) and consumer price inflation (CPI), respectively. The notion that inflation is always a monetary event needs to be revisited and reevaluated, particularly in light of the distinct dynamics of inflation in developing economies. The research indicates a positive correlation between CPI and economic growth. The data indicates that CPI has a significant influence on economic growth in emerging nations like Nepal.

Wealth dynamics in a multi-aggregate closed monetary system

In this work we examine the statistical properties of a closed monetary economy with multi-aggregates interactions. Building upon Yakovenko’s single-agent monetary model (Dragulescu and Yakovenko, 2000), we investigate the joint equilibrium distribution of aggregate size and wealth. By comparing theoretical and simulated data, we validate our findings and investigate the influence of both micro dynamics and macro characteristics of the system on the distribution. Additionally, we analyze the system’s convergence towards equilibrium under various conditions. Our laboratory model may offer valuable insights into macroeconomic phenomena allowing to reproduce typical wealth distribution features observed in real economy.

Cryptocurrency and Macroeconomic Dynamics: Case of 10 Asian Economies

This research study investigates the impact of cryptocurrency on economic growth in 10 countries across Asia during past period 2013–2020. For this purpose, the sample included a range of economies with the highest number of Bitcoin usages or transactions. For this purpose, the sample included a range of economies with the highest number of Bitcoin usages or transactions, according to recent international rankings. With specific empirical means on panel data modelling, we attempted to show that economic growth, was influenced negatively by the cryptocurrency ‘Bitcoin’, and we concluded that this instrument leads to an increase in the inflation rate in a country according to the quantity theory of money and leads to a disorder in the monetary policy of a country. Our framework shows that the economic growth proxy was substantially influenced positively by economic indicators such as technology, investment and education but negatively by the high rate of participation, which caused an increase in unemployment. Our empirical results offer insights and insist on the importance of the intervention of the authorities to oversee and control the use of the cryptocurrency Bitcoin to avoid its negative effects and implement a strategy that overcomes these effects from a macroeconomic perspective. JEL Classification: E22, E24, E42, F43, E44, E52