Essays in monetary theory

Thus far, the theory is not particularly controversial, as the equation of exchange is an identity. A theory requires that assumptions be made about the causal relationships among the four variables in this one equation. There are debates about the extent to which each of these variables is dependent upon the others. Without further restrictions, the equation does not require that a change in the money supply would change the value of any or all of P {\displaystyle P} , Q {\displaystyle Q} , or P ⋅ Q {\displaystyle P\cdot Q} . For example, a 10% increase in M {\displaystyle M} could be accompanied by a change of 1/(1 + 10%) in V {\displaystyle V} , leaving P ⋅ Q {\displaystyle P\cdot Q} unchanged. The quantity theory postulates that the primary causal effect is an effect of M on P .

There are also arguments linking monetarism and macroeconomics , treating monetarism as a special case of Keynesian theory. The central test case over the validity of these theories would be the possibility of a liquidity trap , like that experienced by Japan. Ben Bernanke , Princeton professor and another former chairman of the . Federal Reserve, argued that monetary policy could respond to zero interest rate conditions by direct expansion of the money supply. In his words, "We have the keys to the printing press, and we are not afraid to use them." Progressive economist Paul Krugman has advanced the counterargument that this would have a corresponding devaluationary effect, like the sustained low interest rates of 2001–2004 produced against world currencies. [ citation needed ]

If the quantity of money increases, the additional new quantity of money must necessarily flow first of all into the hands of certain definite individuals – gold producers, for example, or, in the case of paper money inflation, the coffers of the government. It changes only their incomes and fortunes at first and, consequently, only their value judgments. Not all goods go up in price in the beginning, but only those goods that are demanded by these first beneficiaries of the inflation. Only later are prices of the remaining goods raised, as the increased quantity of money progresses step by step throughout the land and eventually reaches every participant in the economy.

Essays in monetary theory

essays in monetary theory

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