Monetary Economics/Preface

Preface

Monetary economics is the study of the money market in an economy - the market which, in most macroeconomic models, is represented by the supply of savings available to meet the demand for investment. In the basic macroeconomic models, this market is assumed to clear, by means of an equilibrium interest rate. However, in most countries residing in the real world, the interest rate is managed by the central bank, simply because the money market tends not to clear on its own. The ability to set the interest rate has become a powerful economic management tool in the arsenal of finance ministers throughout the world today, but there are some instances where countries have voluntarily given it up.

This document will attempt to define the nebulous item often labelled as 'money' by economists. It will then set out the factors affecting the demand and supply of money in an economy, and explore the reasons why the money market does not clear. This document will then move on to monetary policy and global monetary economic history - the practice and ramifications of 'real world' monetary economics.