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