Monetary Economics

Monetary economics is a branch of economics that historically prefigured and remains integrally linked to macroeconomics. It 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. It examines the effects of monetary systems, including regulation of money and associated financial institutions and international aspects.
Modern analysis has attempted to provide a more micro-based formulation of the demand for money and to distinguish valid nominal and real monetary relationships for micro or macro uses, including their influence on the aggregate demand for output. It has also derived and tested the implications of money as a substitute for other assets. and as based on explicit frictions. Research areas have included:
empirical measurement of the money supply, whether narrowly, broadly-, or index-aggregated, in relation to economic activity
debt-deflation and balance-sheet theories, which hypothesize that a change in net worth of borrowers amplifies business fluctuations by changing credit in the same direction
the relation of financial and macroeconomic stability and its implications
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.
monetary impacts on interest rates and the term structure of interest rates
transmission mechanisms of monetary policy as to the macroeconomy
the monetary/fiscal policy relationship to macroeconomic stability
tests of rational expectations as to changes in output from monetary policy
possible advantages of following a monetary-policy rule to avoid inefficiencies of time inconsistency from discretionary policy
"anything that central bankers should be interested in"

Since 1990, the classical form of monetarism has been questioned because of events which many economists have interpreted as being inexplicable in monetarist terms, namely 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 was 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 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."