Monetary Econ
Wicksellian (non-neutrality)
Fisherian (money neutrality)
Central problems
price formation
micro- vs. macroecon approach
interest rate
micro: maximisation of individual utility
macro: money quantity (MV=PY)
not related to money quantity
present vs. future consumption
neutrality of money (long-run)
Wicksell (1898)
Theory of Business cycle
natural (r) vs. market (i) interest rate
i < r: rising investments
more production costs -> + prices
cumulative process
shrinking money reserve -> i = r
"interest rates are relative prices”
natural rate: planned real investment = planned saving
full employment
Fisher (1900-30)
MV=PT
real vs. nominal interest
nominal = real + inflation rate
real = present vs. future consumption
Stockholm School
Keynesians
Austrian School
Monetarism
New Classical School (1990s)
independent from market fluctuations
money supply has only short-term effects
Hayek
ABC theory (Austrian Business Cycle)
integrating business cycles + monetary fluctuations + neoclassical general equilibrium
expansionary policies -> boom-and-bust
restrictive/neutral monetary policies
rising prices -> uncompleted investments
inter-temporal relative prices
price at investment time
price at production time
from Böhm-Bawerk
indirect processes of production
more output, higher financial burdens
i < r -> expansionary phase
back to direct processes of production
unemployment
uncompleted investments
business cycle has monetary origins, but the latter have no long-term, real effects
Lindhal
Myrdal
dynamic equilibrium theory
deflation/inflation adjustments
demand and supply expectations
monetary policies to stabilise prices
value judgments always influence research (Normstreit)
Keynes (1936)
principle of effective demand
against Say’s Law
aggregate expenditure: C + I + Export + G
consumption expectations (demand) determine
employment
supply
interest rate
price formation
money quantity + expectations = capital rate
general theory of static macroeconomic equilibrium
point at which market rate is where total demand (consumption + investments) equals supply
compatible with involuntary unemployment
government intervention in the form of additional public spending (G)
cutting wages
can have negative impacts on total aggregate demand
liquidity preference drives interest rates up and depress investments
focus on short-term dynamics
individual behavoiur
marginal propensity to consume
marginal propensity to save
capital rate -> investment, output, wages
wages and prices are rigid
unionised contracs
changes in demand affect output and employment
investments rise as i < return on capital
liquidity preference
vs. demanded money
low rates = liquidity
high rates = bonds
money supply: central bank
marginal efficency
multiplier effect: less I, even less Y
Hicks’ IS-LM model
Samuelson & Solow
Cambridge Keynesians
Keynesian synthesis
(1950-60)
IS: I = S
equilibrium: IS = LM
LM: L = M
L: determines money demand together with transaction purposes
M: money supply provided by central bank
I: negatively depends on interest rate
S: positively depends on interest rate
full employment / underemployment
underemployment equilibria
liquidity trap
investment trap
rigid wages and prices (Keynes)
interest rates are low and saving rates are high
monetary policy has no effects
solution: public spending (bonds)
marginal efficiency of capital is too low
additional public spending
later work
traps 1) and 2) have only short-term effects
IS-LM does not explain inflation
IS-LM is not a GE model
combinations of interest and income that yield equilibria in the capital market
combinations of interest and income that yield equilibria in the money market
Phillip curves
trade-off between inflation and employment
monetary policies are not neutral in the long run
monetary economies: uncertain profits & growth process tends to produce unemployment
solution: state intervention
reconcile Keynes’ with neoclassical GE
false prices
changes in quantities are more flexible than changes in prices (Walras)
rationing
reverberates across markets
adjustments in Y
New Keynesians (1980s)
nominal & real prices/ wages are sticky
monetary policies have real effects on Y and employment
micro-foundations of general equilibrium and rational expectations
information asymmetries
Stiglitz & Akerlof
imperfect competition
efficiency wages (rigid)
state intervention
credit rationing
Friedman (1960)
microtheoretical reinterpretation of both Keynesian and QMT
natural unemployment
depends on individual preferences
emerges in the long term
intervention
long-term money neutrality
trade-off inflation vs. unemployment
money demand is stable
money demand explains price formation
monetary policies are better than fiscal
goal: low inflation
market takes care of full employment
New neoclassical synthesis
short-term money influence: wrong monetary policy + market ‘frictions’. Frictions = expectation adjustments to actual price changes
Lucas & Sargent
RBC (1980s)
all behaviour is rational
unemployment is voluntary (consumption/leisure optimisation)
no to Phillip curves: unemployment results from rational GE
full price flexibility + continuous market clearing
production results from rational expectations
money is neutral (also short-term)
price change as preference change and technology breakthroughs (= Walras)
Kydland & Prescott
money is neutral
against intervention
IS-AS-MP
Woodford (2000)
output (gaps), inflation and interest are jointly determined
IS-LM model + aggregate supply (AS) + Taylor rule
actual interest rate vs ‘natural rate’
everything is priced in by rational expectations