Trinity College Dublin

DEPARTMENT OF ECONOMICS

Monetary Thought and Policy

The evolution of monetary thought and policy from mercantilism to new classical macroeconomics

Antoin E. Murphy

The stance of monetary policy has a significant influence on financial markets. Why in 2004 have some Central Banks (Federal Reserve, Bank of England) raised interest rates? Are monetary magnitudes moving out of line with the real economy and are such movements viewed as crucial in influencing economic activity? To what extent should control of inflation be deemed to be the main objective of macroeconomic policy? Is excessive attention paid to inflation targeting and insufficient attention given to the issues of growth and employment? Are the Maastricht criteria excessively restrictive for countries facing high rates of unemployment? These are just some of the questions that are germane to monetary policy.

Over the centuries monetary theory has analysed these types of issues. The objective of this course is to link monetary theory to monetary policy by investigating the type of theories that evolved and the way in which they were recommended as policies across time. The time period stretches from the era of mercantilism to modern new classical macroeconomics. By analysing the different monetary theories applied through time one is enabled to evaluate the intellectual criteria on which current monetary policy is based. Are these criteria deeply influenced by the view that money matters or the opposing view that money does not matter? Is money neutral, super-neutral or does it have a real influence on the economy? In answering these questions one is better positioned to evaluate the type and impact of monetary policies implemented by the major central banks in the global economy.

Course Outline

Mercantilism – The Midas fixation of the early writers; ‘the fear of goods and love of money' complex; the misinterpretation of Sir Thomas Mun by Adam Smith and John Maynard Keynes. Should countries run balance of payments surpluses? Is economic activity a zero sum game? Was mercantilistic monetary policy an aggressive or defensive strategy?

Usury and interest. How can investment take place if an interest rate cannot be charged? Should interest rates be regulated? The interest rate controversy is presented through the writings of Josiah Child and John Locke.

Sir William Petty and the embryonic evolution of macroeconomics. The introduction of the velocity of circulation into the quantity theory (Locke and Petty).

Dudley North and Pierre de Boisguilbert and their respective advocacies of free trade and laissez-faire at the end of the seventeenth century.

The monetary economics of John Law in the Essay on a Land Bank and Money and Trade .

John Law's implementation of his monetary theory as monetary policy in France during the Mississippi System.

Financial bubbles. Were the Dutch tulipomania, the Mississippi System and the South Sea speculation examples of financial bubbles?

Macroeconomic model building in Richard Cantillon's Essay on the Nature of Trade in General . The discovery of the entrepreneur. The circular flow of income. The monetary approach to the balance of payments. How to use monetary theory to make a fortune, the case of Richard Cantillon.

Sects and economics . The creation of a new sect called 'les économistes' by Gournay and Quesnay. François Quesnay and Physiocracy. How to zig-zag your way through the tableau économique? Economic activity no longer a zero sum game - the potential for economic growth.

The rise of monetarism. David Hume on the way money influences inflation and the balance of payments. Profits and the rate of interest. The link between Hume and Milton Friedman. Joseph Massie on the natural rate of interest.

Turgot on the role of savings and capital formation.

Is there goodness in greed? Adam Smith and the Wealth of Nations . Smith's approach to monetary economics.

Henry Thornton's monetary theory. An analysis of the three Mr. Thorntons in The Paper Credit of Great Britain . Ricardo on money. The bullionist controversy.

The transformation of economics into the dismal science. Malthusianism and the iron law of wages. The rise of the invisible hand, the use of the Walrasian auctioneer and the demise of the entrepreneur.

The return of the Schumpeterian entrepreneur . Innovations, creative destruction, the link between entrepreneurs and bankers.

The equation of exchange. Irving Fisher on the quantity theory of money. The Cambridge approach.

‘In the long run we are all dead' . Keynes is certainly dead but what about his theory? Which theory? Fundamentalist, hydraulic or reconstituted reductionism?

Clower and Leijonhufvud's reinterpretation of Keynes. The new Keynesianism.

The Phillips Curve and its demise. Friedman and the role of monetary policy. Rational expectations.

New Classical Macroeconomics Mark 1 and Mark 2.

The macroeconomics big board. Monetary targets, inflation targets.

European Monetary Union . The role of the European Central Bank?

ASSESSMENT

There will be an examination at the end of Michaelmas Term (10%) and a project presented during the Hilary and Trinity terms (20%). The final examination constitutes 70% of the grading for the course.

The project will be on a specially selected topic on monetary economics by each student. It length should be anywhere between 3,000 to 5,000 words (word processed). Additionally, the project will be presented individually by each student during seminars in Hilary and Trinity terms.

Some Recommended Reading

Bofinger, Peter. Monetary Policy ( Oxford University Press, 2001).

Bucholz, Todd. New Ideas from Dead Economists (Penguin, 1999)

'Bubble Symposium' Journal of Economic Perspectives , vol. 4. no.2, Spring 1990.

Garber, Peter M. Famous First Bubbles (Massachusetts Institute of Technology, 2000)

*Hutchison, Terence. Before Adam Smith. The Emergence of Political Economy 1662-1776 (Blackwell, 1988)

Kindleberger, C. Manias, Panics and Crashes – A History of Financial Crises (Macmillan, 1978, 1996)

Leijonhufvud, A. On Keynesian Economics and the Economics of Keynes (OUP, 1968)

Middleton, Roger Charlatans or Saviours? Economists and the British Economy from Marshall to Meade (Edward Elgar, 1998)

Murphy, Antoin E. Richard Cantillon : Entrepreneur and Economist (OUP, 1986)

Murphy, Antoin E. John Law Economic Theorist and Policy-Maker (OUP, 1997)

Murphy, Antoin E. Monetary Theory 1601-1758 . (Routledge, 1997).

Robbins, Lionel. A History of Economic Thought The LSE Lectures (Princeton University Press, 1998)

Rotwein, Eugene (ed.). David Hume.Writings on Economics (University of Wisconsin Press, 1970)

Samuels, Warren J. Jeff E. Biddle and John B Davis A Companion to the History of Economic Thought (Blackwell, 2003)

*Schumpeter, Joseph. A History of Economic Analysis (1954, re-print Routledge, 1997).

Snowdon , Brian, Howard Vane, and Peter Wynarczyk. A Modern Guide to Macroeconomics (Edward Elgar, 1994)

*Spiegel, Henry. The Growth of Economic Thought (Duke University Press, 1983)

Strathern, Paul. A Brief History of Economic Genius (Texere, London and New York , 2001)

Vickers, D. Studies in the Theory of Money (Kelley, 1968)

• Recommended texts to purchase.

Journal articles will be recommended in lectures.

Collecting Macroeconomic Data

International Reports:

OECD Economic Outlook

World Economic Report (IMF - annual)

International Financial Statistics (IMF – published monthly)

International Financial Statistics Yearbook

Economic Report of the President ( U.S. )

Ireland

Central Bank of Ireland Quarterly Bulletin

Quarterly Commentary of the Economic & Social Research Institute

Internet sites:

OECD ( http://www.oecd.org )

The Economist ( http://www.economist.com )

Economic Report of the President . The statistical tables of this report may be found at http://www.access.gpo.gov/eop/

The Macroeconomics Resources Site at the Harvard Business School ( http://www.hbs.edu/units/bgie/internet )

This site provides links with a number of other potentially interesting Web sites.

Bill Goffe, University of Mississippi ( http://rfe.wustl.edu ) - Provides useful guide to data sources for economic information.

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Last Updated 29/11/04