Monetary theory

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Monetary theory is a discipline of economics that examines the nature and functions, value and effects of money . Sub-areas of monetary theory include the theory of money demand , the theory of money supply (see money creation ), the explanation of the monetary policy transmission mechanism, inflation theory , interest theory and the theory of monetary policy .

Modern monetary theory

Definition of money

When money is called everything that is accepted as payment in the economy. Nowadays, banknotes and coins (cash) and credit balances in bank accounts (book money) are the main means of payment. Banknotes and coins are used in everyday shopping, especially for small amounts. Funds in bank accounts can be transferred by wire transfer, direct debit, check or credit card; this is known as cashless payment transactions. An important characteristic of money today is that it has no real material value. The acceptance of today's cash and bank balances in business transactions is based both on the trust that money will continue to be accepted as a means of payment in the future, as well as on state coercion (“ legal tender”).

Functions of money

Money fulfills several functions in everyday business life.

First, it serves as a medium of exchange . Without money, it would be much more difficult to make barter deals. A baker who wants meat would have to find a butcher who would like to have a corresponding amount of bread at the same time in order for a barter to take place. A generally accepted means of payment means that exchange partners can be found more quickly and thus the costs of looking for an exchange partner are reduced. In addition, most people are better informed about the value of the money they use every day than they are about other products offered by third parties, so there is no need to laboriously work out the value of the consideration before exchanging.

Second, money is a store of value . In modern economies, numerous options are available for the safekeeping of all assets, both in physical form (valuable goods, for example gold, or real assets, for example machines) and in financial form (cash and bank balances, bonds, shares , Investment certificates, claims against insurance companies or claims from pension provisions, etc.).

Third, the values ​​of different goods and services expressed in monetary units can be compared with one another. For four goods, one of which is used as money, there are exactly three cash prizes. Without money as a general measure of value (unit of account) there would be a total of 6 price ratios (price of good 1 in units of goods 2, 3 and 4; price of good 2 in units of goods 3 and 4; price of good 3 in units of good 4) . Without money, the situation is much more confusing, so that it is more difficult to make economic decisions.

A fourth function is not described in the literature, but is inherent. Money is made when commercial banks or non-banks get into debt. They have to pay interest on this debt. To be able to do this, they have to ask for money. So money has a driving function.

The functions of money create the demand for money . The demand for money as a medium of exchange depends above all on the amount of the intended exchange volume and the amount of interest that is foregone if one holds money instead of interest-bearing assets (when interest rates are high, it is advantageous to invest less money and more interest-bearing assets on average hold and in return to sell securities more often at low interest rates in order to receive money for the purchase of goods and services). The demand for money as a store of value depends primarily on the amount of total wealth, the level of interest paid on alternative assets and the risk that owning money in the form of currency depreciation entails compared to the risk of other assets. If the official currency of a country no longer fulfills the monetary functions due to rapid currency depreciation ( inflation ), there is less and less demand and real goods or foreign currencies take over the monetary functions. This process is known as currency substitution .

Creation of money

Manufacture of banknotes in Russia.

Nowadays, money is usually created in the two-tier banking system consisting of a central bank and (commercial) banks .

Central bank money consists of the cash and the commercial banks' balances with the central bank. If the commercial banks of the central bank sell bills of exchange, foreign exchange or securities, they receive central bank money in the form of bank notes, coins or central bank deposits. Central bank money can also arise through interest-bearing lending by the central bank to commercial banks in return for collateral. The central bank can control the process of central bank money creation through its monetary policy instruments (in particular key interest rates and open market policy ). Money is also created when the central bank makes expenses for which it pays with central bank money.

Deposit money is mainly created when a bank grants a loan and credits the customer with the corresponding amount on his account. This leads to a balance sheet extension; the assets side of the bank balance sheet grows by the loan amount, the liabilities side grows by the customer's account balance. However, banks can not be increased by lending the money supply because they are bound to these loans, depending on the credit risk of up to 8% equity to inferior . Other limiting factors are generally the willingness of banks to lend and customers to borrow (in the event of banking, economic or financial crises, deposit creation may decline and the deposit amount may decrease - see net borrowing ).

Relationship between money supply and inflation rate

Under inflation is defined as the increase in the general price level. As the general price level increases, money loses value. The percentage rate of change in the price level is called the inflation rate. There is good empirical evidence that there is a high positive correlation between the growth rate of the money supply and the inflation rate in the medium and long term . Very high rates of inflation, so-called hyperinflation (such as the German inflation 1914 to 1923 that followed the financing of the First World War ), were always caused by a strong expansion of the money supply (in relation to the stagnating or decreasing amount of goods) and usually currency substitution. With comparatively low inflation rates (less than 10 percent per year), however, it is controversial to what extent the increase in the money supply accompanying inflation is the cause or consequence of inflation.

History of Monetary Theory

The history of monetary theory is closely intertwined with the history of macroeconomics and the history of money . The development of monetary theory can be divided into the following phases: pre-modern monetary theory, classical monetary theory, Keynesian monetary theory, neoclassical synthesis , monetarism , new classical macroeconomics and New Keynesian Economics .

Premodern monetary theory

Although no elaborated monetary theory can be proven in Plato , his monetary policy guidelines - z. B. his aversion to the use of gold and silver, or his idea of ​​a domestic currency that would be worthless abroad - recognize that he assumed that the value of money was independent of its material substance. Aristotle, on the other hand, advocated exactly the opposite theory. Joseph A. Schumpeter speaks in the first case of "Chartal theory", in the other case of metallism or the "metallistic theory" of money.

In the Middle Ages, money was a central question for financing, especially the military-related expenses of the territorial lords, which were often contested by devaluing money or the deterioration of coins . The opinion of Thomas Aquinas and Tholomeus of Lucca that money was the property of the ruler and that its value could be freely determined by him changed to the point that it rather belonged to the general public and that the monetary value should therefore be determined by the classes . This view was most accentuated by Nikolaus von Oresme in his Tractatus de mutatione monetarum , written around 1358 . Gabriel Biel took Oresme's arguments and adapted them to the prevailing conditions at the time, although he did not insist quite as rigorously on the stability of the value of money as Oresme.

Classical monetary theory

The phase of classical monetary theory lasted from around 1800 to 1936. The essential feature of classical monetary theory was the assumption that the goods (real) and monetary (monetary) sectors of the economy were independent of each other (classic dichotomy of the real and monetary sector). According to the classics, money only had the task of simplifying the exchange of goods and services (function of money as a medium of exchange). As a result, monetary policy at the time essentially consisted of issuing banknotes and ensuring that banknotes could be exchanged for gold (or silver). Classical quantity theory was a result of this view. It says that a change in the amount of money in circulation has a directly proportional effect on the macroeconomic price level, while real macroeconomic income (the value of all goods and services produced after price changes) is completely independent of the amount and change in the amount of money in circulation. Karl Marx made a much-received contribution to monetary theory through his value form analysis in Das Kapital well into the 20th century.

Keynesian monetary theory

The publication of the General Theory by John Maynard Keynes marks a milestone in the history of monetary theory. With the General Theory , Keynes et al. a. the attempt to explain the unimaginable levels of unemployment observed during the Great Depression of the 1930s . While there was no (involuntary) unemployment in the theory of the classics, Keynes showed that, under certain conditions, serious and lasting unemployment can occur even in a market economy . He based his argument on a simultaneous analysis of real (income and employment) and monetary (money supply and interest) variables, thereby leaving the framework of the classic dichotomy of the real and monetary sector. There was talk of a scientific revolution.

Neoclassical synthesis

The analysis Keynes made was essentially verbal in nature. In the period that followed, it was formalized and expanded. John Richard Hicks converted the Keynesian argumentation into a mathematical system of multiple equations, which under the name IS-LM model as a neoclassical synthesis had a strong influence on macroeconomics for several decades. A component of the IS-LM model is the Keynesian money demand theory (liquidity preference theory). It represents an expansion of the classic view in that a second function of money, namely the store of value, has now been taken into account. The formalization formed the basis for the Keynesian-oriented monetary and fiscal policy of the 1950s and 1960s. A major problem was that inflation expectations were not sufficiently taken into account.


Monetarism, whose most important representatives include Karl Brunner , Milton Friedman and Allan Meltzer , sees the money supply as the main cause of economic fluctuations. Economic fluctuations are largely avoidable if the central bank works towards an even expansion of the money supply at the level of the average long-term growth rate of real gross domestic product (Friedman's money supply rule).

Neoclassical monetary theory

The New Classical Macroeconomics , of which Robert E. Lucas , Thomas Sargent and Neil Wallace are the most important representatives , is based on the concept of rational expectations . With rational expectation formation, all available information flows into the expectation formation. It is therefore postulated that systematic economic policy measures are foreseen and have no effects on real macroeconomic development. Systematic monetary policy, which reacts in a predictable way to macroeconomic fluctuations, does not have any real economic effects (policy ineffectiveness) in the model framework of the new classics, but only influences the inflation rate. Monetary policy can therefore only achieve real economic effects through surprisingly expanding (expansive) or restrictive (restrictive) measures.

The demand for a micro-economic foundation of macroeconomic models goes back to Robert Lucas (micro-foundation of macroeconomics). The relationships between macroeconomic variables change when the economic policy environment changes; H. even if monetary policy changes. For this reason, regularities observed in the past cannot simply be used as a basis for simulating the effects of monetary policy measures ( Lucas criticism ). Rather, the effects of monetary policy (and other economic policy) measures can be derived from models that depict the behavior of individual market participants, taking into account the respective environment. Such models form, as it were, the laboratory of the macroeconomist; after all, macroeconomics can only carry out experiments in rare exceptional cases to study the effects of economic policy measures.

The new classics introduced rational expectations and the microeconomic foundation into macroeconomics. The substantive statements about the effectiveness of monetary policy could not be maintained, especially because the actual markets are not as flexible and perfect as was assumed in the New Classic.

New Keynesian Monetary Theory

The monetary theory of New Keynesianism combines the methodological advances of monetarism and the neo-classical period with the analysis of the imperfections observed in reality on various markets. One therefore speaks of a New Neoclassical Synthesis . Market imperfections that are important for monetary theory are, in particular, slow price adjustments (rigid prices), imperfect competition on goods markets and asymmetrical information on financial markets . These imperfections have a major impact on overall economic development:

  • Imperfections generally make the market outcome inefficient. This means that there is room for welfare-enhancing economic policies and that monetary policy is not ineffective.
  • Imperfections change the effects of economic shocks on macroeconomic development. Price rigidity, for example, means that monetary shocks have real economic consequences and the classic dichotomy of the monetary and real sectors does not exist.
  • Imperfections can be a source of additional shock. Asymmetrical information and the problems associated with it affect, for example, the real economic equilibrium.

The New Keynesian monetary theory forms the methodological basis for the modern short to medium-term monetary theoretical analysis. It has also had a lasting impact on the practical monetary policy of many central banks. In particular, it provides an explanation of the monetary policy transmission process; H. the transfer of monetary policy measures to the economy as a whole.


Introductory textbooks

Advanced textbooks

  • Jordi Galí: Monetary policy, inflation, and the business cycle. An introduction to the New Keynesian Framework. Princeton University Press, Princeton 2008, ISBN 978-0-691-13316-4 .
  • Carl E. Walsh: Monetary theory and policy. 2nd Edition. MIT Press, Cambridge / London 2003, ISBN 0-262-23231-6 .
  • Michael Woodford: Interest and prices: Foundations of a theory of monetary policy. Princeton University Press, Princeton / Oxford 2003, ISBN 0-691-01049-8 .

Collective works

Other literature

Web links

Individual evidence

  1. ^ Carl Menger: On the origin of money . In: Economic Journal. 2, 1892, pp. 239-255.
  2. This example goes back to Adam Smith. Adam Smith: An inquiry into the nature and the causes of the wealth of nations. 1776 (German: Erich W. Streissler (Hrsg.): Investigation into the nature and causes of the wealth of the peoples. Mohr Siebeck, Tübingen 2005, ISBN 3-8252-2655-7 , p. 105).
  3. ^ Springer Gabler Verlag, Gabler Wirtschaftslexikon, keyword: monetary theory
  4. George T. McCandless, Warren E. Weber: Some monetary facts . In: Federal Reserve Bank of Minneapolis Quarterly Review. 19 (3), 1995, pp. 2-11.
  5. Joseph A. Schumpeter, (Elizabeth B. Schumpeter, ed.): History of economic analysis. First part of the volume. Vandenhoeck & Ruprecht, Göttingen 1965, pp. 95f.
  6. Joseph A. Schumpeter, (Elizabeth B. Schumpeter, ed.): History of economic analysis. First part of the volume. Vandenhoeck & Ruprecht, Göttingen 1965, p. 104.
  7. The classical quantity theory was first described by David Hume (1711–1776). She was later featured in John Stewart Mill: Principles of political economy. JW Parker, London 1848, and in Irving Fisher: The purchasing power of money. Macmillan, New York 1911. For the history and critical assessment of quantity theory, see David Laidler: The quantity theory is always and everywhere controversial: Why? In: Economic Record. 77, 1991, pp. 199-225.
  8. John Maynard Keynes: The general theory of employment, interest and money . Macmillan, London 1936. (German translation: Jürgen Kromphardt, Stephanie Schneider (ed.): General theory of employment, interest and money . 10th edition. Duncker & Humblot, Berlin 2006, ISBN 3-428-12096-5 . )
  9. ^ John R. Hicks: Mr. Keynes and the classics: A suggested interpretation . In: Econometrica. 5, 1937, pp. 147-159.
  10. Duden Wirtschaft from A to Z. Basic knowledge for school and study, work and everyday life. 5th edition. Bibliographisches Institut, Mannheim 2013. Licensed edition Bonn: Federal Agency for Civic Education 2013, keyword monetarism
  11. ^ Thomas Sargent, Neil Wallace: Rational expectations, the optimal monetary instrument, and the optimal money supply rule . In: Journal of Political Economy. 83, 1975, pp. 241-254.
  12. ^ Robert E. Lucas: Methods and problems in business cycle theory . In: Journal of Money, Credit, and Banking. 12 (4), 1980, pp. 696-715.
  13. Marvin Goodfriend: Monetary policy in the New Neoclassical Synthesis: A primer . In: Federal Reserve Bank of Richmond Economic Quarterly. 90 (3), 2004, pp. 21-45.
  14. Olivier Blanchard: What do we know about macroeconmics that Fisher and Wicksell did not? In: Quarterly Journal of Economics. 115, 2000, pp. 1375-1409.