Monetary Economics

Monetary economics, as defined in McCallum’s (1989) textbook, "is concerned with the effects of monetary institutions and policy actions on economic variables [such as] commodity prices, wages, interest rates, and quantities of employment, consumption, and production". The subject covers the origin, functions and value of money, a large part of macroeconomics with an emphasis on monetary policy, central banking and financial institutions and financial markets. As an area of research and teaching monetary economics is frequently merged with the related field of finance (i.e. macro-finance) and is then referred to as financial economics.

Perhaps the picture of the "Money-Changer and his Wife" (by Marinus Van Reymerswaele, 1539; see the complete picture here) creates the impression that monetary economics is of little more than historical importance, but in fact nothing could be further from the truth. Monetary policy and its relationships with the economy and financial markets are in the news on a daily basis. Understanding monetary economics and the operation of financial markets is essential for many, if not all, areas of economic life.

On this webpage I present some of the main strands in monetary economic thinking that I have found important and useful over the years. You may find that these views are on particular issues to some extent contrary to the mainstream of economic analysis. Having said this, I am of course decidedly unapologetic because I think the mainstream is not very helpful or even incorrect on some of these issues.

Major components of this homepage are (see links menu, left)

    • Monetary Policy

How does monetary policy work: The market for bank reserves and policy strategy options. What are key characteristics of monetary policy in several countries.

Several aspects of economic theory are hotly debated, particularly with respect to the operation of markets and the assumption of rational behavior. Unfortunately, many times, theory and empirical evidence become distorted, misrepresented, or ignored. I try to provide a more careful evaluation on the following topics.

    • Famous First Bubbles
    • The Hypothesis of Efficient Financial Markets
    • The Hypothesis of Rational Expectations and Forecasts

Recent contributions to the fundamentals of monetarist economics.

Williamson and Wright (2010), New Monetarist Economics: Methods, FRB St. Louis Review, vol. ( ) July/August 2010: 265-302. PDF file

Meltzer (1995), "Information, sticky prices and macroeconomic foundations," FRB St. Louis Review, vol. ( ) May 1995: 101-118. PDF file

Meltzer (1995), "Monetary, credit and (other) transmission processes: A Monetarist perspective," Journal of Economic Perspectives, vol.9 (4) Fall 1995: 49-72. PDF file (restricted, but copies available elsewhere on the web)

Selected literature

Monetary economics is a very broad subject with many topics. The following list of textbooks provides a more general overview.