6/18/23,f1:39fPM MonetaryfTheoryfandfPolicyflectures
MonetaryfTheoryfandfPolicy
Lecturef Notes
Lecturef1:fWhatfisfmoney?
Sovereignfdefaultfoccursfwhenfafdebtorfhasfnotfmetfhisforfherflegalfobligationsfaccordingftofthe
f debtfcontract.fSovereignfborrowersfsuchfasfnation-
statesfgenerallyfarefnotfsubjectftofbankruptcyf courtsfinftheirfownfjurisdiction,fandfthusfmayfbef
ableftofdefaultfwithoutflegalfconsequences.
Examples:
NorthfKoreafinf1987fonfsomefoffitsfloansf
Russiafinf1998fdefaultedfonfitsfinternalfdebt
Argentinafdefaultedfonf$1fbillionfoffdebtfowedftofthef WB
Thefdefaultingfcountryfandfthefcreditorfcanfrenegotiatefthefinterestfrate,floanflengthforf prin
cipalfpayments.
1998f Russianf financialf crisis
Background:fdecliningfproductivity,fanfartificiallyfhighffixedfexchangefratefandfchronicffiscalfdeficit.f C
onfidencefcrisisfleadsftofrunfonfthefCentralfBankf(investorsfsellingfrubles).fJulyfmonthlyfinterestf p
aymentsfonfRussia’sfdebtfroseftofaffiguref40fpercentfgreaterfthanfitsfmonthlyftaxfcollections. f13f A
ugustf1998:fstock,fbond,fandfcurrencyfmarketsfcollapsefasfafresultfoffinvestorffearsfoffdevaluationf a
ndfdefault.f17fAugustf1998:fthefgovernmentfdevaluesfthefruble,fdefaultsfonfdomesticfdebt,fandf d
eclaresfafmoratoriumfonfpaymentftofforeignfcreditors.
Argentinef economicf crisisf (1999–2002)
1976–
1983:fhugefdebtfacquiredfforfmoneyfforf (unfinishedfprojects),fthefFalklandsfWar,fandfthef state'sfta
keoverfoffprivatefdebts.
1983:f Austral,f newf debtf financesf it
1989:f inabilityftofpayfthefinterestfoffthisfdebtfandfconfidencefinfthefaustralfcollapsed.fJulyf1989,f
Argentina'sfinflationfreachedf200%fthatfmonthfalone,ftoppingf5,000%fforfthefyear.
1990s:f Highf governmentf spendingf andf corruption.f Publicf debtf growsf enormouslyf duringf thef 1990s.
2001:fArgentinaflosesfinvestorsfconfidencefandfthefcapitalfflightfincreases.fPeoplefbeginfwithdrawingf
largefsumsfoffmoneyf(bankfrun).
Corralito:ffreezingfallfbankfaccountsfforftwelvefmonths,fallowingfforfonlyfminorfsumsfoffcashftofbe
f withdrawnf→friots,fstatefoffemergency
Pesificación:f allf bankf accountsf denominatedf inf dollarsf convertedf tof pesosf atf officialf rate
Endfoff2001:ffacingfthefimpossibilityfoffmeetingfdebtfpayments,fArgentinafdefaultsfonftheflargerfpart
f offthefpublicfdebt
about:blank 1/23
,6/18/23,f1:39fPM MonetaryfTheoryfandfPolicyflectures
Russiansf Survivef onf Barter
Cashlessf capitalism:f companiesf countingf moref thanf everf onf barterf tof survive.
Con:fffiistortsfpricesfandfmakesfafmockeryfofftaxfcollection
f Pro:fGetfbyfwithoutfthefbankfcreditsfandfinvestmentfcapit
al
Factoryfworkersfpaidfinfglasswearforfpantyhoses;fteachersfreceivingfheadstones.;frailroad-carfbrake
padsfusedftofpayfrailftariffs.fMuchfoffthefbarterfeconomyfisffarfmorefelaborate.fRussianfindustryf i
ncreasinglyfdependsfonfschemesfinfwhichfgoodsfarefshippedfacrossfthefcountryfinfcomplexfswapsf
thatfcanfinvolvefafdozenfenterprisesforfmore.fTopfbarterfnegotiatorsfreceivef$1,000fafmonth.fSettingf
upfafbarterfchainfisfaftediousfandflongfprocess.
Argentinesf Revertf tof Barter
Safetyfnetfthatfprovidesfeconomicfbenefitsfandfafsocialfandfpsychologicalfboost.fTruequefclubs:fword
f offmouthfandfthenfbyfamplefnewsfcoveragefandfInternet. f500,000fArgentinesfbarterfregularly,fan
df upftofonefmillionfdofsofoccasionally.fFoodfandfproduceftofclothingfandfhomemadefskin-
caref products.fffientalfworkfandfplumbingfforfpsychologicalfcounsellingfandftarotfreadingsftradersfsetf
theirf pricesfbyfsupplyfandfdemand.
StockfandfFlow
Afstockfvariablefisfmeasuredfatfonefspecificftime,fandfrepresentsfafquantityfexistingfatfthatfpointfin
f time,fwhichfmayfhavefbeenfaccumulatedfinfthefpast.fAfflowfvariablefisfmeasuredfoverfanfintervalf
off time.fThereforefafflowfwouldfbefmeasuredfperfunitfofftime.fExamples:fCO2finfatmosphere,fto
nsf emitted;fpopulation,fbirths;ffuelftank,ffuelfconsumption.
Examples:fffiebtfisfstock,fmoneyfisfstock,fincomefisfflow,fsavingsfisfstockfandfwealthfisfstock.
MeaningfoffMoney
Moneyf(moneyfsupply):fanythingfthatfisfgenerallyfacceptedfinfpaymentfforfgoodsforfservicesforfin
f thefrepayment foffdebts;fafstockfconcept.
Currency:f paperf moneyf andf coins
Wealth:ftheftotalfcollectionfoffpiecesfoffpropertyfthatfserveftofstorefvaluef Incom
e:fflowfoffearningsfperfunitfofftime
Functionsf off Money
MediumfoffExchange:fpromotesfeconomicfefficiencyfbyfminimizingftheftimefspentfinfexchanging
f goodsfandfservices.fThefusefoffmoneyfensuresfeconomicfefficiencyfbyfminimisingftheftransactio
nf cost,fi.e.ftheftimefspentftryingftofexchangefgoodsfandfservices.fLet’sftakefforfinstancefthefcasefof
fanf artistfwhofcanfonlyfpaintfimpressionist fpictures fbut falsofneedsftofeat.
UnitfoffAccount:fusedftofmeasurefvaluefinfthefeconomy.fTransactionfcostsfcanfalsofbefreducedfbyfthe
f introductionfoffmoneyfwhenfwefneedftofmeasurefthefvaluefoffthefgoods.fExample:fiffwefhavefthre
ef products,fbread,ft-
shirtsfandfhaircutsfwefwillfneedftofknowfhowfmuchfbreadfcanfbefexchangedfforf oneft-
shirtfandfforfonefhaircutfandfhowfmanyft-shirtsfcanfbefexchangedfforfafhaircut.
StorefoffValue:fusedftofsavefpurchasingfpower;fmostfliquidfoffallfassetsfbutflosesfvaluefduringf infl
ation.fThisffunctionfisfnotfspecificftofmoneyfalone,fbutfcanfbeffulfilledfbyfotherftypesfoffassets.
about:blank 2/23
, 6/18/23,f1:39fPM MonetaryfTheoryfandfPolicyflectures
Individualsfstillfpreferfthefholdfmoney.fThefreasonfcanfbeffoundfinfthefeconomic fconceptfoffliquidity
.f Thisfisfdefinedfasfthefrelativefeasefandfspeedfwithfwhichfanfassetfcanfbefconvertedfintofafmediumf
off exchange.
Characteristicsf off money
Acceptability.fMoneyfmustfbefgenerallyfacceptedfbyfallfasfthefmediumfoffexchange.
ffiurability.fTheflongerftheftimefandfthefnumberfoffusesfoffthefobjectfitself,fthefmorefdurablefand
f thereforefthefmorefsuitable ftofbefusedfasfafmediumfoffexchange.
Convenience.fThefeasierfforfindividualsftofholdforftofcarryfthefasset,fthefmorefsuitableftofusefinfthef
marketftransactionsfasfmoney
ffiivisibility.fThefcurrencyfmustfbefdivisibleftofallowfforfafcloserfreflectionfoffthefrelationshipfbetweenf
thefvaluefandfthefpricefoffthefgoods,fservicesfandffactorsfoffproduction.fAlso,fitfmustfbefeasierffor
f individualsfusefsmallerfnumberfoffunitsfoffthefcurrencyfwhenftheyfwantftofpurchasefcheaperfgoods
.
Uniformity.fThefqualityfoffthefassetfmustfbefidentifiedfmuchfmorefeasilyfandfitfincreasesfthe
f likelihoodfthatfallfeconomic fagentsfacceptfthefassetfasfafmeansfoffpayment
Hardfforfindividualsftofproducefthemselves.fThefvaluefoffthefassetfusedftofpayfforfgoods,fservices
f andffactorsfoffproductionfmustfbefthefsamefasfthefvaluefoffthefgoodsfitfisfusedftofpurchase.
Stabilityfoffvalue.fThefmorefthefpurchasingfpowerfoffanfassetfisfpreservedfoverftimefthefmoreflikely
f itfwouldfbefthatfallfeconomicfagentsfwouldflikeftofusefitfasfafmediumfoffexchange.
Evolutionf off thef Paymentsf System
Barterf Economyf fCommodityf Moneyf fRepresentativef Money
FiatfMoney:fCurrencyfdecreedfbyfthefgovernmentfasflegalftenderf(mustfbefacceptedfasfafmeansfof
f payment).fItsfusefulnessfdoesfnotfresultffromfanyfintrinsicfvalueforfguaranteefthatfitfcanfbef co
nvertedfintofgoldforfanotherfcurrency,fbutfinsteadffromfafgovernment'sforderf(fiat)fthatfitfhasftof b
efaccepted.
Nowadays:fChecks,fElectronicfPaymentf(e-
money):fmoneyfthatfexistsfonlyfinfelectronicf(andfisfaf substitutefforfcash).
Measuringf Money
Therefarefmanyfwaysfinfwhichfmoneyfsupplyfcanfbefmeasured:fthefdifferentfmonetaryfaggregates.
f Theyfmainlyfdependfonftheftypesfoffassetsfincludedfinfeachfmeasure.fWefreferftofnarrowfandfbroa
df money.fThefnarrowestfmeasurefisfM0f(knownfalsofasfbasefmoney,fmonetaryfbase,fnarrowfmone
y).f Thefbroadestfmeasuresf(alsofcalledf“higherforderfaggregates”)fcouldfbefM4,fM5,fetc.
about:blank 3/23
MonetaryfTheoryfandfPolicy
Lecturef Notes
Lecturef1:fWhatfisfmoney?
Sovereignfdefaultfoccursfwhenfafdebtorfhasfnotfmetfhisforfherflegalfobligationsfaccordingftofthe
f debtfcontract.fSovereignfborrowersfsuchfasfnation-
statesfgenerallyfarefnotfsubjectftofbankruptcyf courtsfinftheirfownfjurisdiction,fandfthusfmayfbef
ableftofdefaultfwithoutflegalfconsequences.
Examples:
NorthfKoreafinf1987fonfsomefoffitsfloansf
Russiafinf1998fdefaultedfonfitsfinternalfdebt
Argentinafdefaultedfonf$1fbillionfoffdebtfowedftofthef WB
Thefdefaultingfcountryfandfthefcreditorfcanfrenegotiatefthefinterestfrate,floanflengthforf prin
cipalfpayments.
1998f Russianf financialf crisis
Background:fdecliningfproductivity,fanfartificiallyfhighffixedfexchangefratefandfchronicffiscalfdeficit.f C
onfidencefcrisisfleadsftofrunfonfthefCentralfBankf(investorsfsellingfrubles).fJulyfmonthlyfinterestf p
aymentsfonfRussia’sfdebtfroseftofaffiguref40fpercentfgreaterfthanfitsfmonthlyftaxfcollections. f13f A
ugustf1998:fstock,fbond,fandfcurrencyfmarketsfcollapsefasfafresultfoffinvestorffearsfoffdevaluationf a
ndfdefault.f17fAugustf1998:fthefgovernmentfdevaluesfthefruble,fdefaultsfonfdomesticfdebt,fandf d
eclaresfafmoratoriumfonfpaymentftofforeignfcreditors.
Argentinef economicf crisisf (1999–2002)
1976–
1983:fhugefdebtfacquiredfforfmoneyfforf (unfinishedfprojects),fthefFalklandsfWar,fandfthef state'sfta
keoverfoffprivatefdebts.
1983:f Austral,f newf debtf financesf it
1989:f inabilityftofpayfthefinterestfoffthisfdebtfandfconfidencefinfthefaustralfcollapsed.fJulyf1989,f
Argentina'sfinflationfreachedf200%fthatfmonthfalone,ftoppingf5,000%fforfthefyear.
1990s:f Highf governmentf spendingf andf corruption.f Publicf debtf growsf enormouslyf duringf thef 1990s.
2001:fArgentinaflosesfinvestorsfconfidencefandfthefcapitalfflightfincreases.fPeoplefbeginfwithdrawingf
largefsumsfoffmoneyf(bankfrun).
Corralito:ffreezingfallfbankfaccountsfforftwelvefmonths,fallowingfforfonlyfminorfsumsfoffcashftofbe
f withdrawnf→friots,fstatefoffemergency
Pesificación:f allf bankf accountsf denominatedf inf dollarsf convertedf tof pesosf atf officialf rate
Endfoff2001:ffacingfthefimpossibilityfoffmeetingfdebtfpayments,fArgentinafdefaultsfonftheflargerfpart
f offthefpublicfdebt
about:blank 1/23
,6/18/23,f1:39fPM MonetaryfTheoryfandfPolicyflectures
Russiansf Survivef onf Barter
Cashlessf capitalism:f companiesf countingf moref thanf everf onf barterf tof survive.
Con:fffiistortsfpricesfandfmakesfafmockeryfofftaxfcollection
f Pro:fGetfbyfwithoutfthefbankfcreditsfandfinvestmentfcapit
al
Factoryfworkersfpaidfinfglasswearforfpantyhoses;fteachersfreceivingfheadstones.;frailroad-carfbrake
padsfusedftofpayfrailftariffs.fMuchfoffthefbarterfeconomyfisffarfmorefelaborate.fRussianfindustryf i
ncreasinglyfdependsfonfschemesfinfwhichfgoodsfarefshippedfacrossfthefcountryfinfcomplexfswapsf
thatfcanfinvolvefafdozenfenterprisesforfmore.fTopfbarterfnegotiatorsfreceivef$1,000fafmonth.fSettingf
upfafbarterfchainfisfaftediousfandflongfprocess.
Argentinesf Revertf tof Barter
Safetyfnetfthatfprovidesfeconomicfbenefitsfandfafsocialfandfpsychologicalfboost.fTruequefclubs:fword
f offmouthfandfthenfbyfamplefnewsfcoveragefandfInternet. f500,000fArgentinesfbarterfregularly,fan
df upftofonefmillionfdofsofoccasionally.fFoodfandfproduceftofclothingfandfhomemadefskin-
caref products.fffientalfworkfandfplumbingfforfpsychologicalfcounsellingfandftarotfreadingsftradersfsetf
theirf pricesfbyfsupplyfandfdemand.
StockfandfFlow
Afstockfvariablefisfmeasuredfatfonefspecificftime,fandfrepresentsfafquantityfexistingfatfthatfpointfin
f time,fwhichfmayfhavefbeenfaccumulatedfinfthefpast.fAfflowfvariablefisfmeasuredfoverfanfintervalf
off time.fThereforefafflowfwouldfbefmeasuredfperfunitfofftime.fExamples:fCO2finfatmosphere,fto
nsf emitted;fpopulation,fbirths;ffuelftank,ffuelfconsumption.
Examples:fffiebtfisfstock,fmoneyfisfstock,fincomefisfflow,fsavingsfisfstockfandfwealthfisfstock.
MeaningfoffMoney
Moneyf(moneyfsupply):fanythingfthatfisfgenerallyfacceptedfinfpaymentfforfgoodsforfservicesforfin
f thefrepayment foffdebts;fafstockfconcept.
Currency:f paperf moneyf andf coins
Wealth:ftheftotalfcollectionfoffpiecesfoffpropertyfthatfserveftofstorefvaluef Incom
e:fflowfoffearningsfperfunitfofftime
Functionsf off Money
MediumfoffExchange:fpromotesfeconomicfefficiencyfbyfminimizingftheftimefspentfinfexchanging
f goodsfandfservices.fThefusefoffmoneyfensuresfeconomicfefficiencyfbyfminimisingftheftransactio
nf cost,fi.e.ftheftimefspentftryingftofexchangefgoodsfandfservices.fLet’sftakefforfinstancefthefcasefof
fanf artistfwhofcanfonlyfpaintfimpressionist fpictures fbut falsofneedsftofeat.
UnitfoffAccount:fusedftofmeasurefvaluefinfthefeconomy.fTransactionfcostsfcanfalsofbefreducedfbyfthe
f introductionfoffmoneyfwhenfwefneedftofmeasurefthefvaluefoffthefgoods.fExample:fiffwefhavefthre
ef products,fbread,ft-
shirtsfandfhaircutsfwefwillfneedftofknowfhowfmuchfbreadfcanfbefexchangedfforf oneft-
shirtfandfforfonefhaircutfandfhowfmanyft-shirtsfcanfbefexchangedfforfafhaircut.
StorefoffValue:fusedftofsavefpurchasingfpower;fmostfliquidfoffallfassetsfbutflosesfvaluefduringf infl
ation.fThisffunctionfisfnotfspecificftofmoneyfalone,fbutfcanfbeffulfilledfbyfotherftypesfoffassets.
about:blank 2/23
, 6/18/23,f1:39fPM MonetaryfTheoryfandfPolicyflectures
Individualsfstillfpreferfthefholdfmoney.fThefreasonfcanfbeffoundfinfthefeconomic fconceptfoffliquidity
.f Thisfisfdefinedfasfthefrelativefeasefandfspeedfwithfwhichfanfassetfcanfbefconvertedfintofafmediumf
off exchange.
Characteristicsf off money
Acceptability.fMoneyfmustfbefgenerallyfacceptedfbyfallfasfthefmediumfoffexchange.
ffiurability.fTheflongerftheftimefandfthefnumberfoffusesfoffthefobjectfitself,fthefmorefdurablefand
f thereforefthefmorefsuitable ftofbefusedfasfafmediumfoffexchange.
Convenience.fThefeasierfforfindividualsftofholdforftofcarryfthefasset,fthefmorefsuitableftofusefinfthef
marketftransactionsfasfmoney
ffiivisibility.fThefcurrencyfmustfbefdivisibleftofallowfforfafcloserfreflectionfoffthefrelationshipfbetweenf
thefvaluefandfthefpricefoffthefgoods,fservicesfandffactorsfoffproduction.fAlso,fitfmustfbefeasierffor
f individualsfusefsmallerfnumberfoffunitsfoffthefcurrencyfwhenftheyfwantftofpurchasefcheaperfgoods
.
Uniformity.fThefqualityfoffthefassetfmustfbefidentifiedfmuchfmorefeasilyfandfitfincreasesfthe
f likelihoodfthatfallfeconomic fagentsfacceptfthefassetfasfafmeansfoffpayment
Hardfforfindividualsftofproducefthemselves.fThefvaluefoffthefassetfusedftofpayfforfgoods,fservices
f andffactorsfoffproductionfmustfbefthefsamefasfthefvaluefoffthefgoodsfitfisfusedftofpurchase.
Stabilityfoffvalue.fThefmorefthefpurchasingfpowerfoffanfassetfisfpreservedfoverftimefthefmoreflikely
f itfwouldfbefthatfallfeconomicfagentsfwouldflikeftofusefitfasfafmediumfoffexchange.
Evolutionf off thef Paymentsf System
Barterf Economyf fCommodityf Moneyf fRepresentativef Money
FiatfMoney:fCurrencyfdecreedfbyfthefgovernmentfasflegalftenderf(mustfbefacceptedfasfafmeansfof
f payment).fItsfusefulnessfdoesfnotfresultffromfanyfintrinsicfvalueforfguaranteefthatfitfcanfbef co
nvertedfintofgoldforfanotherfcurrency,fbutfinsteadffromfafgovernment'sforderf(fiat)fthatfitfhasftof b
efaccepted.
Nowadays:fChecks,fElectronicfPaymentf(e-
money):fmoneyfthatfexistsfonlyfinfelectronicf(andfisfaf substitutefforfcash).
Measuringf Money
Therefarefmanyfwaysfinfwhichfmoneyfsupplyfcanfbefmeasured:fthefdifferentfmonetaryfaggregates.
f Theyfmainlyfdependfonftheftypesfoffassetsfincludedfinfeachfmeasure.fWefreferftofnarrowfandfbroa
df money.fThefnarrowestfmeasurefisfM0f(knownfalsofasfbasefmoney,fmonetaryfbase,fnarrowfmone
y).f Thefbroadestfmeasuresf(alsofcalledf“higherforderfaggregates”)fcouldfbefM4,fM5,fetc.
about:blank 3/23
