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Questions and Answers
What is the definition of money according to the textbook?
What is the definition of money according to the textbook?
Anything that is generally accepted as payment for goods or services or in the repayment of debts.
What are the three functions of money?
What are the three functions of money?
A medium of exchange must be easily standardized, widely accepted, and divisible. This is an example of how money functions in the economy.
A medium of exchange must be easily standardized, widely accepted, and divisible. This is an example of how money functions in the economy.
True
What are the two main views on money?
What are the two main views on money?
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What are some of the limitations of Bitcoin as a suitable form of money?
What are some of the limitations of Bitcoin as a suitable form of money?
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What are the key features of the 2021 Bitcoin law in El Salvador?
What are the key features of the 2021 Bitcoin law in El Salvador?
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What are some of the advantages of stablecoins?
What are some of the advantages of stablecoins?
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What are some of the concerns regarding stablecoins?
What are some of the concerns regarding stablecoins?
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Which of these are considered to be some of the attractions of cryptocurrencies? Select all that apply.
Which of these are considered to be some of the attractions of cryptocurrencies? Select all that apply.
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What are some of the policy options that could be taken to address the potential risks associated with cryptocurrencies?
What are some of the policy options that could be taken to address the potential risks associated with cryptocurrencies?
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What is a CBDC?
What is a CBDC?
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What is a key question surrounding CBDCs?
What is a key question surrounding CBDCs?
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What are some of the limitations of CBDCs?
What are some of the limitations of CBDCs?
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How does the ECB define Money Supply?
How does the ECB define Money Supply?
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The Quantity Theory of Money suggests that the percentage change in the money supply directly correlates to the percentage change in the price level.
The Quantity Theory of Money suggests that the percentage change in the money supply directly correlates to the percentage change in the price level.
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What are some of the key issues in using monetary aggregates to interpret the economy?
What are some of the key issues in using monetary aggregates to interpret the economy?
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What are the three Keynesian motives for holding money?
What are the three Keynesian motives for holding money?
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The Quantity Theory of Money is a theory that states that inflation is always and everywhere a monetary phenomenon.
The Quantity Theory of Money is a theory that states that inflation is always and everywhere a monetary phenomenon.
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What are some of the reasons for the shift in focus from money-inflation to credit-crisis nexus since the 1990s?
What are some of the reasons for the shift in focus from money-inflation to credit-crisis nexus since the 1990s?
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The recent inflation surge can be explained by money growth.
The recent inflation surge can be explained by money growth.
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What are the main costs associated with anticipated inflation? Select all that apply.
What are the main costs associated with anticipated inflation? Select all that apply.
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How does unanticipated inflation impact the economy?
How does unanticipated inflation impact the economy?
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Inflation can reduce the risk of hitting the zero lower bound.
Inflation can reduce the risk of hitting the zero lower bound.
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What is one benefit of inflation for the Euro Area?
What is one benefit of inflation for the Euro Area?
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What is the Phillips Curve?
What is the Phillips Curve?
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Demand shocks can cause higher inflation through output gaps, whereas supply shocks (either temporary or permanent) might lead to lower inflation.
Demand shocks can cause higher inflation through output gaps, whereas supply shocks (either temporary or permanent) might lead to lower inflation.
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The COVID-19 shock had both negative demand and negative supply effects.
The COVID-19 shock had both negative demand and negative supply effects.
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Low inflation is generally considered a 'natural' state.
Low inflation is generally considered a 'natural' state.
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Explain the link between the level of inflation and its volatility.
Explain the link between the level of inflation and its volatility.
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Countries with high inflation typically have more stable institutions, which help to keep inflation under control.
Countries with high inflation typically have more stable institutions, which help to keep inflation under control.
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What characterizes hyperinflation?
What characterizes hyperinflation?
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Hyperinflation is primarily a result of a lack of fiscal discipline, often driven by government attempts to finance budget deficits through excessive printing of money.
Hyperinflation is primarily a result of a lack of fiscal discipline, often driven by government attempts to finance budget deficits through excessive printing of money.
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Study Notes
Monetary Economics Lecture 1: Introduction & Recap
- Course covers Monetary Economics (FEB23010) with a focus on European monetary integration
- Builds on prior knowledge in Macroeconomics and International Economics
- Textbook: Economics of Monetary Union by Paul de Grauwe, 14th ed, 2022
- Materials (slides, supplementary readings) available on Canvas
- Grading: 80% final exam, 20% group assignment; group assignment information on Canvas
- 7 lecture sessions, 3 question sessions
Today's Topics
- What is money?
- Cryptocurrencies
- Quantity Theory of Money
- Money & inflation
- Inflation
What is Money?
- Textbook definition: "Anything that is generally accepted as payment for goods or services or in the repayment of debts"
- "Anyone can issue money, the problem is getting it accepted" (Minsky, 1986)
- "All money is credit, but not all credit is money" (Ingham, 2020)
- "Money depends on trust. It is accepted in exchange for goods and services only because people can confidently assume that others will accept it in the future" (Acemoglu, 2021)
Functions of Money (1 of 3)
- Means of exchange/means of payments
- Unit of account
- Store of value
Functions of Money (2 of 3)
- Medium of exchange: eliminates the trouble of finding a double coincidence of needs (reduces transaction costs); promotes specialization
- A medium of exchange must: be easily standardized, be widely accepted, be divisible, be easy to carry, not deteriorate quickly
Functions of Money (3 of 3)
- Unit of account: used to measure value in the economy; reduces transaction costs
- Store of value: used to save purchasing power over time; other assets also serve this function; money is the most liquid of all assets but loses value during inflation
Digitization of Money
- Most money is already electronic/digital
- For money, easy transmission of information is good, but easy copying is not
- New forms of digital money need progress in cryptography, distributed ledger technology, and introduction of digital tokens
Taxonomy of Money and Digital Currencies (Diagram)
- Illustrates different forms of money based on issuer (government or private), form (physical or digital), and transaction type (centralized or decentralized)
- Includes examples like coins, banknotes, CB reserves, crypto-CBDCs, commodity money, bank deposits, and cryptocurrencies
Views on Money (1 of 2)
- Metallism vs. chartalism: Whether money derives value from its underlying commodity or from the state's authority
- Monetary system based on external anchors (e.g., gold) versus systems based on central bank reputation
- Private vs. public money: Free banking, currency competition, distrust of powerful central banks; full reserve or narrow banking, distrust of banks; inside vs. outside money (bank deposits/assets)
Views on Money (2 of 2)
- Current system: combination of private inside money (bank deposits) and public outside money (banknotes)
- Bitcoin: mixing metallism and private money; aims to remove money from state and bank control; nostalgia for metal money (artificial scarcity)
Is Bitcoin Suitable as Money?
- Not stable enough to be a strong unit of account—imagine taking out a mortgage in bitcoin
- Inconvenient as a means of payment due to instability and transaction costs
- 2021 El Salvador experiment
El Salvador Experiment
- El Salvador dollarized in 2001; the US dollar is legal tender
- 2021 Bitcoin law: bitcoin became legal tender, must be accepted when offered, can be used to quote prices/pay taxes; strong incentives (e.g., $30 bonus in Chivo app) for adopting Bitcoin; lower price for gasoline when paying with Bitcoin; no transaction fees
Recent Evidence (Survey)
- Nationally representative face-to-face survey of 1800 Salvadoran households in February 2022
- Despite a "big push" by the government and many adopting Chivo Wallets, Bitcoin usage for everyday transactions is low.
Stablecoins
- Cryptoassets that try to tie their value to fiat currency (e.g., Tether)
- Allow for dollar-like transactions in the crypto-sphere without a banking connection
- Primarily used within the crypto-industry, not for retail payments
Issues with Stablecoins
- Fragility: only as stable as the collateral behind it; risk-free collateral is unprofitable; incentive to invest in risky assets or bitcoin-backed loans; lack of transparency and regulation
- Financial stability concerns: run on stablecoin triggering fire sales of collateral, disrupting regular markets (e.g., certificates of deposits)
- Banks' exposure to crypto assets still limited
What Makes Cryptocurrencies Attractive?
- Libertarian political narrative: anti-state, anti-bank
- Tech-optimism
- Niche usages: criminal activities, cross-border payments, money in developing countries, seigniorage, get-rich-quick schemes
Why Bother About Cryptocurrencies?
- Resource consumption (energy, brainpower)
- Negative effects on society (crime, gambling)
- Extreme speculation, compromises market integrity
- Financial stability issues
- Policy options: laissez-faire, prohibit, regulate
Central Bank Digital Currencies (CBDCs)
- A digital alternative for cash, currently under development
- What form: token or account?
- Solution in search of a problem? Or for anchoring the monetary system/preserving the role of public money in a digital economy?
Issues with CBDCs
- No obvious case for digital euro in retail payments (except international payments)
- CBDCs may erode banks' deposit base, possibly easing bank runs
- Privacy concerns vs. government information needs
- Concentration of power at central banks
- Paradoxical conclusion in recent reports: digital euro should be present everywhere but important nowhere (e.g., Brunnermeier & Landau, 2022)
ECB Definitions of Money
- Money supply can be measured narrowly or broadly, depending on bank deposits included
- M0 (base money) = currency & reserves with central bank
- M1 = currency + overnight deposits
- M2 = M1 + deposits with agreed maturity (up to 2 years) + redeemable deposits (up to 3 months)
- M3 = M2 + repurchase agreements + money market mutual funds + debt securities (up to 2 years)
The ECB's Printing Press: Will M0 Spill Over Into M3? (Graph)
- Shows the trends of M0 (base money) and M3 (broad money supply) over time in the Euro area
- Illustrates the relationship between the two monetary aggregates
Quantity Theory of Money
- Fisher's Equation of Exchange: (M × V) = (P × Y) or (M × V) = (P × T)
- M = money supply
- V = velocity of money
- P = price level
- Y/T = GDP or transaction volume
- Friedman's perspective: inflation is always and everywhere a monetary phenomenon
- Quantity theory as inflation theory
Issues in the Use of Monetary Aggregates
- Which M to choose?
- Can the central bank control M?
- Instability in velocity (graph)
Related to Velocity: Money Demand
- Keynesian Motives: transactions motive, precautionary motive, speculative motive
- Demand for real money balances: (Md/P) = f(i, Y)
- Md = demand for money
- i = interest rate
- Y = real income
Money and Inflation
- Relationship between inflation and money growth (graph)
- Testing the Quantity Theory, international comparisons
- Level of inflation matters (graphs)
Costs of Inflation: Anticipated Inflation
- Shoe leather costs
- Socially unproductive efforts to conserve on money
- Menu costs
- Distortions due to tax system
Costs of Inflation: Unexpected Inflation
- Incorrect anticipation of inflation impairs the signal function of prices
- Monetary misperceptions
- Wealth redistribution (nominal wages, nominal interest rates, financial contracts)
- Risk premium for long terms contracts
- Rationale for inflation-indexed bonds
Benefits of Inflation
- Reduced risk of hitting the zero lower bound
- Easier reduction in real wages
- Higher average inflation allows for easier macroeconomic adjustment (in Euro area)
- Easier means adjustment without deflation
Causes of Inflation: Short-Run Aggregate Supply
- Short-run aggregate supply curve/Phillips Curve: positive relationship between output and inflation
- Demand shocks, firms/workers raise prices and wages
- Supply shocks (temporary or permanent) may lead to higher inflation
Contribution of Shocks to Euro area Inflation (Table)
- Summarizes the contributions of different economic shocks to inflation over various periods in the Euro area
Links Between Inflation and Inflation Volatility
- Low inflation as a "natural" state (political consensus) with constrained room for disagreement
- High inflation opens room for policy disagreement
- Influence of expectations and price rigidity
- Institutions work to maintain tradition of price stability
- High inflation can break institutional arrangements (no longer brake on inflation)
Inflation and Inflation Volatility (Graph)
- Demonstrates the relationship between the average inflation rate and its standard deviation
Hyperinflation
- Out-of-control price increases (typically defined as >50% per month)
- Monetary phenomenon, caused by very rapid increases in the money supply
- Resulting from fiscal problems (failure to raise sufficient revenue, budget deficit), not necessarily monetary problems
- Hyperinflationary spiral (eventually causes printing more money)
Other Important Notes
- Contains definitions, graphs, tabular data relating to ECB money supply measures (M0-M3) and their changes throughout the years
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Description
Dive into the fundamentals of Monetary Economics in this introductory lecture. Covering the essence of money, cryptocurrencies, and the Quantity Theory of Money, this session sets the stage for further discussions on money and inflation. This quiz will test your understanding of the key concepts from Lecture 1.
