A central quandary of modern economics in general, and monetary theory in particular, is this: today, in advanced industrial economies, most money—certainly money at the margin—is interest bearing, and the difference between the interest paid on money in, say, a cash management account15 and a T-bill is determined not by monetary policy, but by transactions costs. In effect, with modern technology, individuals can use T-bills for transactions. There is no opportunity cost, at the margin, in holding “money.” (To be sure, there is an opportunity cost in holding currency, but there are few economists......
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A Critique of the Transaction-based Theory of the Demand For Money
There are several reasons why one might be suspicious of traditional explanations. Keynes was, perhaps, not as clear concerning the definition of money as he could have been. The absence of clarity may have been deliberate, enabling him to slip from one use to another, without the reader being aware. We focus our attention on demand deposits, because these are the part of money most directly under the control of monetary authorities, and then slightly more broadly, on M1, which includes currency.
Keynes spoke of three motives for holding money: the precautionary, the speculative, and the transactions......
The Critical Assumption: Perfect Capital Markets
One of the most important developments in economic theory, but of the past fifteen years has been the exploration of the consequences of imperfect and costly information for the functioning of the capital market.
It has been shown that models that assumed imperfect capital markets may have been much closer to the mark than those that, on the contrary, assumed perfect capital markets.
These studies have shown that capital markets that are competitive—in the sense that word is commonly used—may be characterized by credit and equity rationing. The models based on imperfect and costly information......
The Wavering Case For The Irrelevance Of Money
Research over the past three decades has managed to both strengthen—and weaken—the argument that money does not matter. Extending the general equilibrium approach (Stiglitz (1969, 1974a)) to show the irrelevance of corporate financial policy, public financial policy was shown to have no effect.
Establishing a form of Say’s law for government debt, Stiglitz (1988a) showed that if the government reduced taxes and increased its debt, the demand for government bonds increased by an amount exactly equal to the increase in supply.
Furthermore, a change in the term structure of government debt......
Reflections On The Current State Of Monetary Economics
To theorists, monetary economics has long presented a challenge: finding the assumptions under which it does or does not matter. The challenge is all the greater
because while it is easy to construct models in which money matters, it is hard to believe that the quantitative effects in at least many of these are significant enough to account for observed behavior.
For instance, macro-economists have often relied on the real balance effect, the fact that as prices fall, the real value of money increases, making individuals feel better off. However, for moderate rates of decline in prices, the......
White Collars Turn Blue - Paul Krugman
A note to readers: This was written for a special centennial issue of the NYT magazine. The instructions were to write it as if it were in an issue 100 years in the future, looking back at the past century.
When looking backward, one must always be prepared to make allowances: it is unfair to blame late 20th-century observers for their failure to foresee everything about the century to come. Long-term social forecasting is an inexact science even now, and in 1996 the founders of modern nonlinear socioeconomics were still obscure graduate students. Still, even then many people understood that......
Japanese Management
A stererotyped image of Japanese management, so populer and widely shared among foreigners, also exists among the Japanese themselves.
According to this view, Japanese management has unique features: lifetime commitment of workers to the firm, the length-of-service reward system, and enterprise unionism as a partner in the fiim. These features, which one could legitimalely describe as integral elements of Industrial relations, Imply that workers are immobile and committed to their employer’s implicit guarantee of employment throughout their working careers, that wages are determined not by......
