Monetary Economics

Monetary Economics

Monetary Economics

Monetary Economics


This textbook seeks to break new ground in developing an integrated and comprehensive overview of advanced monetary economics. It integrates the presentation of monetary theory with its heritage, empirical formulations and empirical tests.


This book represents a comprehensive presentation of monetary economics. It integrates the presentation of monetary theory with its heritage, its empirical formulations and their econometric tests. While its main focus is on monetary theory and its empirical tests rather than on the institutional monetary and financial structure of the economy, the latter is brought in wherever needed for elucidating a theory or showing the limitations to its applicability. The illustrations for this purpose, as well as the empirical studies cited, are taken from the United States, Canada and the United Kingdom. We also attempt to take some account of the significant differences between the financially developed economies and the less-developed or developing ones.

In addition, our presentation also provides an introduction to the main historical patterns of monetary thought and the diversity of ideas in monetary economics, especially on the effectiveness of monetary policy and the contending schools in monetary theory and policy.

Our presentation of the theoretical aspects of monetary economics is tempered by the goals of empirical relevance and intuitive understanding. The derivation of the theoretical implications is followed by a discussion of their simplifications and modifications made in the process of econometric testing, and the empirical results from some empirical studies.

Part One of the book consists of the introduction to monetary economics and its heritage. The latter is not meant to be exhaustive but is intended to illustrate the evolution of monetary thought and to provide the reader with a flavour of the earlier literature on this subject.

Part Two places monetary microeconomics in the context of the Walrasian general equilibrium model. This chapter captures the foundations of money in the economy to the extent that these are reflected in the rational economic behaviour of households and firms in competitive markets.

Part Three focuses on the demand for money. Besides the usual treatment of the transactions and speculative demands, this part also presents recent models of the precautionary demand for money. It further introduces the reader to the more recent contributions on the buffer stock demand for money. The three theoretical chapters on the components of money demand are followed by three chapters on its empirical aspects, including a separate chapter on the criteria and tests underlying monetary aggregation.

Part Four deals with the supply of money and the role of the central bank in determining the money supply. Besides presenting the main approaches to the money supply process, this part also examines the important policy issues of the potential conflicts among policy makers, central bank independence, discretionary monetary policy versus simple decision rules, and credibility of monetary policy.

No presentation of monetary economics can be complete without adequate coverage of monetary policy and its impact on the macroeconomy. Proper treatment of this topic requires knowledge of the underlying macroeconomic models and their implications for monetary policy. Parts Five and Six of the book focus on money and monetary policy in the macroeconomy. The five chapters of Part Five present the main macroeconomic models of

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