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<ref name =deL>[http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf ''The de Larosière Report (Report of the High-Level Group on Financial Supervision in the EU'', European Commission, February 2009]</ref>
{{subpages}}


<ref name=turner>[http://www.fsa.gov.uk/pubs/other/turner_review.pdf ''The Turner Review: A regulatory response to the global banking crisis'', Financial Services Authority, March 2009]</ref>
[[Monetarism]] is a theory that explains  [[inflation]] as the inevitable consequence of an increase in the [[money supply]] and prescribes control of the money supply as the only means of controlling inflation.


<ref name=T2>[http://www.fsa.gov.uk/pubs/discussion/dp09_04.pdf ''Turner Review Conference Discussion Paper: A regulatory response to the global banking crisis: systemically important banks and assessing the cumulative impact'', Financial Services Authority, October 2009]</ref>


<ref  name=treasury>[http://www.treas.gov/press/releases/docs/capital-statement_090309.pdf ''Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms'', US Treasury Department, September 2009]</ref>
==Overview==
A simplistic version of monetarism, offers an easily understood explanation of inflation and a straightforward prescription for its cure. It seems intuitively obvious that if pound notes were dropped by helicopter to the extent necessary to double the amount in circulation, then prices would double. It is a small step from that "thought experiment" to the conclusion that inflation is caused by an increase in the money supply, and it is an obvious further step to prescribe control of the money supply as the cure for inflation. However, the economists of the ''Chicago School'' did not take so simple a view, but accepted that, although such an explanation would hold in a primitive society , in which a single financial asset provided the only means of payment, it could not be assumed to hold in a modern society that has fractional-reserve banking and a variety of different financial assets.


==The monetary equation==
Monetarism is  conventionally explained in terms of the "quantity theory of [[money]]" <ref>[http://cepa.newschool.edu/het/essays/money/quantity.htm Quantity  Theory of Money (CEPA)]</ref>  which derives from the equation
:::: MV=PT<br>
in which M is money stock, V the velocity with which money circulates, P the average price level and T the number of transactions.  An implication of that equation is  that if  V and  T can be assumed constant,  an increase in the '' money supply'' (will produce a corresponding increase in the general level of prices.


<ref name=imf>[http://www.imf.org/external/pubs/ft/weo/2009/02/pdf/c3.pdf ''Lessons for Monetary Problems from Asset Price Fluctuations'',  (World Economic Outlook October 2009 Chapter 3) International Monetary Fund 2009]</ref>.


<ref name=warwick>[http://www2.warwick.ac.uk/research/warwickcommission/report/swc_report.pdf ''The Warwick Commission on International Financial Reform: In Praise of Unlevel Playing Fields'', (The report of the second Warwick Commission) University of Warwick, November 2009]</ref>.
Monetarism is founded upon the contention that for practical purposes, V and T can be assumed constant. Its validity  thus  depends upon the empirical confirmation of that assumption.  


<ref name=bofe>[http://www.bankofengland.co.uk/publications/other/financialstability/roleofmacroprudentialpolicy091121.pdf ''The Role of Macroprudential Policy'', a discussion paper, Bank of England, November 2009]</ref>
==The behaviour of the velocity of circulation==
An analysis of United States statistics <ref> Friedman and Meiselman The relative stability of monetary velocity and the Investment Multiplier in the United States 1897-1958 in ''Stabilisation Policies, CMC Research Papers'' p165  Prentice-Hall 1964</ref>, indicated that price increases had, in fact, followed money supply increases, but with time-lags that were long and variable.  Critics argued that this was not conclusive proof,  and  further statistical tests <ref>
[http://cepa.newschool.edu/het/essays/monetarism/monetarcont.htm The development of monetarism (CEPA)]</ref> were attempted to test it against the Keynesian theory that increases in the money supply would not affect the prices of goods because they would be spent on financial assets. The results did not give conclusive support to that alternative explanation, nor to the contention that it could safely be ignored.


==The transmission mechanism==


<ref>[http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm Ben Bernanke: ''Asset-Price "Bubbles" and Monetary Policy'' (Speech to the New York Chapter of the National Association for Business Economics, New York, New York, October 15 2002) Federal  Reserve Board 2002]</ref>; and in a 2005 lecture, Jean-Claude Trichet,  the President of the European Central Bank, argued that not all  bubbles threaten financial stability, and that if  policy-makers attempted  to eliminate all risk from the financial system, they either fail or they would  "hamper the appropriate functioning of a market economy"<ref>[http://www.ecb.int/press/key/date/2005/html/sp050608.en.html Jean-Claude Trichet: ''Asset price bubbles and monetary policy'',(Mas lecture, 8 June 2005) European Central Bank, 2005]</ref>.
==Employment effects==
<ref>[http://www.bis.org/review/r090826a.pdf Mark Carney, Governor of the Bank of Canada: ''Some Considerations on Using Monetary Policy to Stabilize Economic Activity'', (Speech to the Foreign Policy Association, New York, 19 November 2009)Bank for International Settlements, 2009]</ref>, and by Federal Reserve  Board Governor Frederic Mishkin <ref>[http://www.federalreserve.gov/newsevents/speech/mishkin20080515a.htm Frederic Mishkin: ''How Should We Respond to Asset Price Bubbles'', Board of Governors of the Federal Reserve System, October 2008]</ref>


<ref>[http://www.boj.or.jp/en/type/ronbun/ron/wps/data/wp06e10.pdf Hiroshi Ugai: ''Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses'', Bank of Japan, July 2006]</ref>
==Exchange rate effects==
 
Shigenori Shiratsuka
 
<ref>[http://www.bankofengland.co.uk/monetarypolicy/framework.htm ''Monetary Policy Framework'', Bank of England, 2009]</ref>
 
<ref>[http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN018308.pdf Arzu Çetinkaya and' Devrim Yavuz'Calculation of the Output-Inflation Sacrifice Ratio: The Case of Turkey'', The Central Bank of the Republic of Turkey, October 2002]</ref>
 
<ref>[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=186368 Laurence Boone and Benoit Mojon: ''Sacrifice Ratio in Europe: A Comparison of France, Germany, Italy and the U.K.'', (Available at SSRN) 1999]</ref>
 
<ref>[http://economia.unipv.it/pagp/pagine_personali/gascari/macro/ball_sacrifice%20ratio.pdf Laurence Ball: ''What Determines the Sacrifice Ratio?'', National Bureau of Economic Research, 1994]</ref>
 
<ref>[http://www.house.gov/jec/fed/fed/transpar.htm Robert E. Keleher: ''Transparency and Federal Reserve Monetary Policy '', United States Congress Joint Economic Committee, November 1997]</ref>
 
<ref>[http://www.federalreserve.gov/generalinfo/faq/faqfomc.htm ''Federal Open Market Committee: Frequently Asked Questions'', Federal Reserve Board, 2009]</ref>


==Technical problems==


==Practical experience==


==Current practice==


<references/>
<references/>

Revision as of 05:30, 11 December 2009

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Monetarism is a theory that explains inflation as the inevitable consequence of an increase in the money supply and prescribes control of the money supply as the only means of controlling inflation.


Overview

A simplistic version of monetarism, offers an easily understood explanation of inflation and a straightforward prescription for its cure. It seems intuitively obvious that if pound notes were dropped by helicopter to the extent necessary to double the amount in circulation, then prices would double. It is a small step from that "thought experiment" to the conclusion that inflation is caused by an increase in the money supply, and it is an obvious further step to prescribe control of the money supply as the cure for inflation. However, the economists of the Chicago School did not take so simple a view, but accepted that, although such an explanation would hold in a primitive society , in which a single financial asset provided the only means of payment, it could not be assumed to hold in a modern society that has fractional-reserve banking and a variety of different financial assets.

The monetary equation

Monetarism is conventionally explained in terms of the "quantity theory of money" [1] which derives from the equation

MV=PT
in which M is money stock, V the velocity with which money circulates, P the average price level and T the number of transactions.  An implication of that equation is  that if  V and  T can be assumed constant,  an increase in the  money supply (will produce a corresponding increase in the general level of prices. 



Monetarism is founded upon the contention that for practical purposes, V and T can be assumed constant.  Its validity  thus  depends upon the empirical confirmation of that assumption.

The behaviour of the velocity of circulation

An analysis of United States statistics [2], indicated that price increases had, in fact, followed money supply increases, but with time-lags that were long and variable. Critics argued that this was not conclusive proof, and further statistical tests [3] were attempted to test it against the Keynesian theory that increases in the money supply would not affect the prices of goods because they would be spent on financial assets. The results did not give conclusive support to that alternative explanation, nor to the contention that it could safely be ignored.

The transmission mechanism

Employment effects

Exchange rate effects

Technical problems

Practical experience

Current practice

  1. ↑ Quantity Theory of Money (CEPA)
  2. ↑ Friedman and Meiselman The relative stability of monetary velocity and the Investment Multiplier in the United States 1897-1958 in Stabilisation Policies, CMC Research Papers p165 Prentice-Hall 1964
  3. ↑ The development of monetarism (CEPA)
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