Paper: Classifying Monetary Economics

16 11 2011

Image of yellow starAuthors: Philip Arestis, University of Cambridge and Alexander Mihailov, University of Reading

Full title: Classifying Monetary Economics: Fields and Methods from Past to Future

PDF iconTo read this paper, click on the link below.

Conference paper: Classifying Monetary Economics

We are also publishing two expert invited commentaries that respond to Prof. Arestis and Prof. Mihailov’s paper, by Jagjit Chadha, University of Kent, and Sergio Rossi, University of Fribourg.

We very much look forward to your responses to the paper and the commentaries – please use the comments box at the foot of this post to leave a response.


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27 responses

16 11 2011
Today’s sessions – Wednesday « Wiley Economics Online Conference

[…] Classifying Monetary Economics: Fields and Methods from Past to Future […]

16 11 2011
Terefe

Dear Profs Mihailov and Arestis.
Thank you very much for such very important output. I appreciate from my heart.
But how do we consider the external effect that affect the whole world? In particular, the impact on developing countries which are the victim of such external effects. What is the possible policy recommendation you suggest for the developed/rich countries who produced the external effects

16 11 2011
Alexander Mihailov

Dear Terefe,

Thank you for your appreciation and comment.

If I understand correctly what your main point is about, it seems to relate to the external effects monetary policy and financial stability of the leading economies have on the rest of the world, the developing economies in particular. While this has not been at the centre of our attention in the classificatory overview of monetary economics here, it is certainly of relevance to the international spill-over (or contagion) effects of the global financial crisis (as well as of earlier business cycle fluctuations). Without pretending to be an expert on the global governance structures and institutions that would be in the interest of a large majority of countries and citizens, such as the IMF, the World Bank and similar organisations for international policy coordination in their present or reformed versions, I would agree that such external effects should be, in principle, minimised or internalised in an appropriate way. Global economic stability should be a priority, and negative spill-over effects from one country to the rest should be avoided or isolated, with joint efforts.

Often, however, the real-world environment evolves with complexities, interdependencies, risks and surprises that pose a problem to the controllability of the desired economic trajectories of nations as well as to the unambiguously ‘correct’ policy formulation or implementation from a global perspective. While the financial crisis exposed a number of weaknesses in institutions, regulations, policies, not all of these could have been perhaps easily predicted. The point is that we all, academics as well as policymakers, businesses as well as individuals, learn the main lessons in order to improve our models, institutions, behaviour and prevent similar weaknesses in the future, insofar possible. There is the human factor, of course, the policymakers in our countries, the parliaments, the citizens; but there is also the complex and seemingly cyclical evolution of the interdependent global and national economies, subjected to a number of ‘shocks’ of various nature, idiosyncratic or common, as well as to diverse political views and strategic interactions. So the task may not be that straightforward.

16 11 2011
Margaret Giles

Having been immersed in teaching first year principles classes for many years, as well as undertaking applied microeconomics research, I have not kept up with other aspects of our not-at-all dismal discipline. It has been wonderful having this summary of developments in monetary economics that post-date my undergraduate and even my postgraduate studies. Thank you 🙂

16 11 2011
Alexander Mihailov

Dear Margaret,

Thank you for your kind appreciation of our attempt at a synthesis and a classification of monetary economics. We are glad it provides an update of insights for you. However, as we say at a few places in the paper, our aim was to possibly order in a coherent way the accumulating knowledge in the field and stimulate discussion. So our scheme is neither exhaustive, nor final, and mostly represents the evolution of the mainstream. As such, the article has its limitations, of course, as those that were pointed by our two discussants and as those that begin appearing in this column. We were aware of or anticipating these, to some extent at least, and had to define our ‘mandate’ when writing in a finite, implementable way, as we did, though imperfectly…

16 11 2011
Bun Hold

To decrease uncertainty in value, we may study from Arabian monetary which use gold as payment instrument.

16 11 2011
Alexander Mihailov

Dear Bun Hold,

As I wrote above, we had to limit our focus to the most widely known and evolving dominant theories, empirical approaches and policy implications in monetary economics. We have thus left outside the scope of our article a number of dimensions that may provide further richness or even controversies in addition to the issues we discussed. I’d be willing myself to read more and fill in gaps I certainly have in monetary history and in monetary theory or policy, including on what you suggest, thanks. Let me, however, just mention that gold has its disadvantages too, mostly in terms of an exogenous and/or fluctuating source of money supply, and there is literature on these aspects related to the Gold Standard and its gradual replacement by fiat money systems.

16 11 2011
Muawya Ahmed Hussein

“The evolving mainstream paradigm in monetary economics, broadly reflected in our classification scheme, has often been questioned, especially since the advent of the global financial crisis.” As economist we have to cope with the current situation and find a model of monetary economics that help in minimizing these crises.

16 11 2011
Alexander Mihailov

Dear Muawya Ahmed Hussein,

I agree, and I think the paradigm as well as the remaining approaches to money, banking, public and private finance are currently undergoing discussions, revisions, extensions and enrichment. Perhaps better models, stronger institutions and more well-informed and well-coordinated policies will emerge to steer the global economy away from abrupt and deep disturbances in the future. But this will not necessarily be a quick or easy process, e.g., with view to my replies above acknowledging a range of limitations, interactions and complexities.

16 11 2011
Edgar Aroutiounian

Greetings,

It seems that a central problem of ‘monetary’ economics is the rather lack of a strong foundational paradigm. There appears to be no monetary theory that all others necessarily respond to. Rather, it appears that contemporary monetary theory is a hodgepodge of insight of which it is a function of ideology rather than informed theory. This is somewhat disappointing given the prominent role that monetary theory, and thereby policy, has in affecting national goals, ie inflation, employment, etc.

Do the authors believe that this is merely the nature of the beast or could there be a day, in the near future one hopes, of a unification of at least some kind of consensus theory.

Thank you.

16 11 2011
Alexander Mihailov

Dear Edgar,

I would agree with your summary that there have been several monetary theories with ensuing recommendations for monetary policy even within the so-called ‘mainstream’ evolving over the last century, with periodic tendencies for more consensus or less. If we add ‘heterodox’ schools of thought, just mentioned in a few of our footnotes or quotes to the literature and related branches of international economics, banking and finance, which we did not go into to keep our focus in the paper, the diversity will become much higher.

I am not engaging here, of course, my co-author with an opinion, and write from my own viewpoint. I think we may continue to observe periods of convergence to a core, widely-shared body of knowledge and methods in monetary economics, but divergence and controversies in other periods – in the future as it has been in the past. Either ‘the nature of the beast’, as you put it, is too complicated and multi-faceted for a unified theory to prevail one day, or the real-world environment is continuously evolving so it cannot be captured by a single rigidly specified model forever. Such lines of thought seem to broadly share the perspective proposed by Professor Chadha, one of our discussants, in particular in his last page or so when defining (alternatively) monetary economics. On the other hand, not consolidating views into a unique theory may be ‘healthy’ too, as Professor Rossi, our other discussant, argues in his comments in favour of pluralism in economic science and education. Then particular policymakers will follow the advice of particular policy experts, for good or bad; and shifts in political and academic influences will take turns, as history has shown.

16 11 2011
Dr. R. Shashi Kumar.

Really a good work has done, highlighting the need for restructuring the monetary issues in economic science. A wonderful attempt.

16 11 2011
Alexander Mihailov

Thank you, Dr Kumar.

16 11 2011
Donald A R George

Where would the authors place the work of Moore and Kiyotaki (e.g.“Balance Sheet Contagion” , and “Evil is the Root of All Money”, both in American Economic Review Papers and Proceedings (2002), Vol. 92, No. 2) in their classification scheme?

17 11 2011
Alexander Mihailov

Dear Professor George,

Thank you for pointing to these two wonderful, short and clear papers by Kiyotaki and Moore, which I suggest everybody who is interested to expand a bit the context of our overview article reads. We would place the ‘balance-sheet’ article within C: it is about inter-firm credit, true, but a broader analogy is made that it would apply to richer (and more contrived) models with a banking sector; moreover, as there is an explicit account of a balance-sheet channel in it, which also goes somewhat into the direction Professor Chadha suggests in his comment, such a classification within C will also fit the ‘credit view’, not just the financial intermediation or macro-finance linkage characteristics discussed briefly there. The ‘evil’ (or ‘distrust’) article would rather pertain to E in our scheme, as it belongs to the broader legislative approach, requiring in their set-up verification of paper claims by judges in addition to enforcement. With view to such inevitable omissions in our bibliography, we have to emphasise once again that it was impossible to include all relevant papers. Also, we may not have offered a grid/disaggregation within C and E (and elsewhere in our subfields) sufficiently fine and detailed where the above two articles would fit in a tighter way. Yet our classification remains broad and general enough to accommodate these two papers, and possibly many others not quoted, within the respective similar strands we did delineate and label (with approximations, of course).

16 11 2011
bagumhe

How countries like those in East African Community which are currently negotiating for the monetary union can benefit from this wonderful paper. isk particularly on the risk involved in linking their monetary policies.

17 11 2011
Alexander Mihailov

Dear bagumhe,

Of course, there are costs as well as benefits relating to entering a monetary union. These have been discussed long in the international monetary economics literature, mostly in relation with the theory of optimal currency areas (OCAs) developed by Robert Mundell and its applications, in particular to the case of the European Monetary Union (EMU). Endnote 3 explains that, to keep our article focussed, we do not cover exchange rate and open-economy issues. For a lucid introduction into the theme, you may read chapters 19 and 20 in the widely-used undergraduate textbook by Paul Krugman and Maurice Obstfeld entitled “International Economics: Theory & Policy”, Pearson (9th, global, edition, 2012). For a more detailed account, you may go through another widely-used undergraduate textbook, by Paul De Grauwe entitled “Economics of Monetary Union”, Oxford University Press (9th, revised, edition, 2012). Of course, there are plenty of other bibliographical sources you may wish to look at too, as well as to follow developments in the EMU covered in the media.

18 11 2011
Alexander Mihailov

Just missed to mention above: Marc Melitz is the third co-author, joining Krugman and Obstfeld with this 9th, global edition of their well-known textbook on international economics, apologies…

16 11 2011
Aldona Zawojska

Wonderfully comprehensive study on monetary economics. However, I think that some input on ethical questions of money and monetary policy would be valuable. The contribution of the Greeks (Aristotle and Plato) to money and interest theory has been of signal importance in the history of economic thought. Moreover, we should not forget about Nicolaus Copernicus who brought monetary reform to Poland through understanding of connections between money supply and price levels – an early form of QTM (Monetae Cudendae Ratio, 1526 written by request of Sigismund the Old, King of Poland). Similarly David Hume was omitted in the paper.
As an academic teacher on economics I am regularly asked the question, “Why do we need theory?” I think that the paper gives some response to this question. From the perspective of practical application of theory, it seems that majority of policy decision-makers either do not know (or understand) theory or do not listen to theorists. Similarly, within the academia pure theory is sometimes ignored or neglected.

17 11 2011
Alexander Mihailov

Dear Professor Zawojska,

Thank you for your feedback – and apologies for my somewhat delayed reaction. However, the benefit of the delay is that I can now congratulate you on the occasion of winning the award for the ‘comment of the first day’ of this wonderful Wiley-JoES Economics virtual conference! Well deserved indeed!

I largely agree with what you write, being also an academic teacher of economics. We are aware of the points you raise, and they are well taken. In some of our earlier versions we had a note (skipped later on for brevity, and as we thought it obvious) saying that our purpose was not to delve into the history of economic thought. Not because it is uninteresting or irrelevant, but because our update and ordering of the accumulating knowledge was meant to centre mostly on the last two decades since the “Handbook of Monetary Economics” of 1990 (edited by Benjamin Friedman and Frank Hahn) was published, though from a longer-run contextual perspective of about a century. This is the only reason to omit voluntarily the aspects and the authors you mention.

16 11 2011
The Wrap – Day 1 « Wiley Economics Online Conference

[…] Paper – Mihailov, Classifying Monetary Economics […]

17 11 2011
Tetyana Marena

What impact has the global economic crisis had for the methods of monetary policy and how is it observed in modern monetary economics? Thank you for deep research presented and for reply.

17 11 2011
Alexander Mihailov

Dear Tetyana,

Thanks for your appreciation and question. As also suggested in our article, it is clear that the global financial crisis will lead to a major rethinking of the current paradigm and to enriching the models of various strands in the orthodox and heterodox literatures on monetary economics, to better account for features of relevance missing earlier. Such a process has been emerging even before the crisis, but it accelerated considerably as it aggravated. For one recent account of what has been reassessed or subjected to revisions and extensions, see most of the articles collected in the Brookings Papers on Economic Activity, Issue 2, Fall 2009, among many other sources.

17 11 2011
Winning Comment – Day 1 « Wiley Economics Online Conference

[…] delighted to announce the winner of the first “comment of the day” award: Aldona Zawojska, who commented on Alexander Mihailov and Philip Arestis‘s paper Classifying Monetary […]

17 11 2011
Muhammad Anees

Based on my limited knowledge of Monetary Economics and Public Finance/Fiscal Economics, the monetary policy in particularly affects economies in the short run and effective in conjunction with fiscal policies in the long run. I have a simple question about the fied of monetary economics describing and evaluating policies in developing and developing counties in general or these distinguished fields of the Monetary Economics. An insight would be valuable for expanding my limited knowledge.

17 11 2011
Alexander Mihailov

Dear Muhammad,

Of course, there is a literature that analyses monetary (and macroeconomic) policies specifically in developing countries. We have not highlighted this particular dimension in our article as it was not at the centre of our focus. I could suggest that you may look into these two recent references, to get you started, at least: “Monetary Policies for Developing Countries: The Role of Institutional Quality,” by Haizhou Huang and Shang-Jin Wei in the Journal of International Economics, Volume 70, 2006, pp. 239-252, for a general theoretical account; “The Initial Impact of the Crisis on Emerging Market Countries,” by Olivier Blanchard, Mitali Das and Hamid Faruqee in the Brookings Papers on Economic Activity, Issue 1, Spring 2010, pp 263-323, for the effects of the current global crisis. The bibliography quoted in these two articles will help you identify further works of relevance to your interest.

17 11 2011
The Wrap – Day 2 « Wiley Economics Online Conference

[…] the ESWC 2010 in Shanghai, and, of course, our first “comment of the day” award went to Aldona Zawojska – congratulations once […]




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