Monetary economics

Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value, and unit of account), and it considers how money can gain acceptance purely because of its convenience as a public good. The discipline has historically prefigured, and remains integrally linked to, macroeconomics. This branch also examines the effects of monetary systems, including regulation of money and associated financial institutions and international aspects. Modern analysis has attempted to provide microfoundations for the demand for money and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand for output. Its methods include deriving and testing the implications of money as a substitute for other assets and as based on explicit frictions. The foundational concept of any modern theory of money is the understanding that the value of fiat money depends upon exchange and not weight (compare with the Arrow-Debreu model). Traditionally, research areas in monetary economics have included: Empirical determinants and measurement of the money supply, whether narrowly, broadly, or index-aggregated, in relation to economic activity Empirical determinants of the demand for money. Credit theory of money (also called debt theory of money), concerning the relationship between credit and money. Debt deflation and balance-sheet theories, which hypothesize that over-extension of credit associated with a subsequent asset-price fall generate business fluctuations through the wealth effect on net worth. Monetary aspects studied by central banks. The monetary/fiscal policy relationship to macroeconomic stability The effect of money supply growth on inflation. The political economy of financial regulation and monetary policy Monetary implications of the asset-price/macroeconomic relation: the quantity theory of money, monetarism, and the importance and stability of the relation between the money supply and interest rates, the price level, and nominal and real output of an economy.

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