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Monetary economics
Monetary economics is a branch of economics that historically prefigured and remains integrally linked to macroeconomics.[1] Monetary economics provides a framework for analyzing money in its functions as a medium of exchange, store of value, and unit of account. It considers how money, for example fiat currency, can gain acceptance purely because of its convenience as a public good.[2] It examines the effects of monetary systems, including regulation of money and associated financial institutions[3] and international aspects.[4] Modern analysis has attempted to provide a micro-based formulation of the demand for money[5] and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand for output.[6] Its methods include deriving and testing the implications of money as a substitute for other assets[7] and as based on explicit frictions.[8] Research areas have included:

empirical determinants and measurement of the money supply, whether narrowly-, broadly-, or indexaggregated, in relation to economic activity[9]

debt-deflation and balance-sheet theories, which hypothesize that over-extension of credit associated with a subsequent asset-price fall generate business fluctuations through thewealth effect on net worth.[10] and the relationship between the demand for output and thedemand for money[11]

monetary implications of the asset-price/macroeconomic relation[12] the quantity theory of money,[13] monetarism,[14] and the importance and stability of the relation between the money supply and interest rates, the price level, and nominal and real output of an economy.[15]

monetary impacts on interest rates and the term structure of interest rates[16] lessons of monetary/financial history[17] transmission mechanisms of monetary policy as to the macroeconomy[18] the monetary/fiscal policy relationship to macroeconomic stability[19] neutrality of money vs. money illusion as to a change in the money supply, price level, or inflation on output[20]

tests, testability, and implications of rational-expectations theory as to changes in output or inflation from monetary policy[21]

monetary implications of imperfect and asymmetric information[22] and fraudulent finance[23] game theory as a modeling paradigm for monetary and financial institutions [24] the political economy of financial regulation and monetary policy[25] possible advantages of following a monetary-policy rule to avoid inefficiencies of time inconsistency from discretionary policy[26]

"anything that central bankers should be interested in."[27]

Current state of monetary economics[edit]

Since 1990, the classical form of monetarism has been questioned. This is because of events which many economists interpret as inexplicable in monetarist terms, especially the unhinging of the money supply growth from inflation in the 1990s and the failure of pure monetary policy to stimulate the economy in the 2001-2003 period. Alan Greenspan, former chairman of the Federal Reserve, argued that the 1990s decoupling may be explained by a virtuous cycle of productivity and investment on one hand, and a certain degree of "irrational exuberance" in the investment sector. Economist Robert Solow of MIT suggested that the 2001-2003 failure of the expected economic recovery should be attributed not to monetary policy failure, but rather to the breakdown in productivity growth in crucial sectors of the economy, most particularly retail trade. He noted that five sectors produced all of the productivity gains of the 1990s, and that while the growth of retail and wholesale trade produced the smallest growth, they were by far the largest sectors of the economy experiencing net increase of productivity. "2% may be peanuts, but being the single largest sector of the economy, that's an awful lot of peanuts."

Source: http://en.wikipedia.org/wiki/Monetary_economics