Rabin A Monetary Theory 31 35
Rabin A Monetary Theory 31 35
Rabin A Monetary Theory 31 35
Monetary theory
NOTES
1. Friedman (1993) provides empirical evidence supporting the plucking model. In a much-cited
article on asymmetry, Cover (1992) finds that negative money supply shocks have a greater
effect on output than positive shocks. Kim and Nelson (1999) formally test Friedmans model.
Their results support it and find no role for symmetric cycles.
2. Some new Keynesian economists conceive of long-run hysteresis effects in which potential
output itself would change following a major shock to the economy.
Money in macroeconomics
21
3. The translation test is so named in a broader context by Flew (1971, p. 359), who quotes
Thomas Hobbess advocacy of it in Leviathan, Chapters 8 and 46.
4. Strictly speaking, k is not precisely the reciprocal of V. As becomes clear from the text that
follows, k pertains to money at an instant of time, V to money over an interval of time.
5. Chapter 3 presents the Wicksell Process and the closely related fundamental proposition of
monetary theory. The latter presupposes a closed economy or one with a freely floating
exchange rate. Things are different, as explained in Chapters 3 and 9, in an economy open to
international transactions at a fixed exchange rate.
6. Here and elsewhere, confronting errors can be an expository device. The purpose is not simply
to flog dead horses, blow down straw men, or discredit other economists. Errors can be instructive by revealing points requiring clearer or fuller exposition and by making the correct
doctrines stand out in contrast.
7. The words in brackets are not Tobins but Meiers.
8. We realize that velocity became unstable for a period in the 1970s and then from the early
1980s onward. Chapter 2 investigates these phenomena.
9. Hicks (1935 [1967]) recognizes the subjective nature of money demand. Indeed, he argues
(p. 63) that money must have a marginal utility. However, he later (1967, especially pp. 14,
16) repudiates that analysis and argues that no transactions demand for money could be
analyzed with marginal utility theory. However, he does recognize a subjective precautionary and speculative demand for money.
10. Fisher (1911, 1922) pays predominant attention to mechanical determinants of velocity of
the sorts mentioned in the text, but he does not deny or ignore the subjective determinants,
as is evident from his surveys among Yale students and professors (1922, pp. 37982).
11. See references to Kuenne and Schumpeter on pages 2630 below. Chapter 2 elaborates on this
paragraph.
12. The words in brackets were a footnote. Clark Warburton in an unpublished book-length
manuscript argues that this passage does not fully describe Says view. Warburton quotes
other passages in which, according to his interpretation, Say recognizes that money can have
an important influence on business conditions.
13. For documentation, see Yeager (1973, 1985, 1986, 1988, 1991 [1997]).
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24
Monetary theory
credit card system, enabling the authorities to monitor all transactions, legal
as well as criminal.)
In short, money promotes efficient production responsive to peoples wants.
It does so by facilitating all of these: exchange and fine-grained specialization
in production; the credit system, financial markets and real capital formation;
the transmission and use of knowledge; and economic calculation and informed
choice through comparisons of revenues and expenses, of prospective profits
in different lines and scales of production, of costs and expected satisfactions,
and of the offers of rival potential trading partners. By helping make markets
work smoothly, money fosters impersonal cooperation among people unknown
to each other; it contributes to anonymity and privacy and so even to freedom.
To summarize in another way, money helps markets work by cutting transactions costs and information costs and requirements of many kinds (compare
Brunner and Meltzer, 1971 and Alchian, 1977). In indirect barter, for example,
information would be necessary about the qualities, values and marketability
of the intermediate goods that one accepted in exchange in hopes of being able
to trade them away for the goods really wanted. Using money as the universal
intermediate good avoids these extra information requirements and costs. These
cost and information aspects of money are reflected in the traditional list of
desirable characteristics of an ideal money material: portability, durability,
homogeneity, cognizability, divisibility and stability of value.
Moneys functions as store of value and standard of deferred payments seem
less fundamental than the first two, deriving from them. Many physical and
financial assets are stores of value, not just money, and money is not a good
store of value in times of inflation. Money could not serve as a medium of
exchange unless it could be stored between transactions. Being a standard of
deferred payments the unit in which debts and payments in long-term
contracts, such as leases, are expressed is part of the unit-of-account function.
The services of money to society as a whole, notably as an aid to economic
calculation, are emphasized by considering how inflation and other monetary
disorders undercut them.