It is the description of a complementary currency with the attribute of a never changing value, settled by a never changing quantity of this complementary currency. It leads to the possibility of monetary scaling based on this absolute value and allows the introduction of mathematically determined exchange rates. Also Trading imbalances can be considered in the mathematically determination of exchange rates.
It is the model of a global reference complementary currency, abbreviating named ANNA, with the task to be a currency and exchange rate system for central banks.
It should be seen as a system of voluntary participation and leads to a currency area, if more than one country will participate to the system. The architecture of the monetary system implies minimum a second complementary currency as an intermediary foreign exchange currency. This monetary design will lead to a protection of the currency area, because:
1) It is a global system and independent from national interests. The monetary policy in ANNA will be less complex due to the absence of additional money supply and interest rates.
2) The intermediary foreign exchange currency leads to balancing effects between the systems of ANNA and FOREX
3) Monetary policy of single national inside currencies remains completely in self determination of the countries.
4) The exchange rates of inside currencies are always conclusive to each other, due to the mathematically determination. It prevents from speculative trading of currencies.
5) The never changing value of ANNA is a long term consideration of debts. It allows also the introduction of independent interest free national currencies. Both aspects together can be seen as a tool to interrupt the helix of debts.
The system succeeds if mutual benefits can be obtained for the FOREX and the participating countries. Heavily indebted poor countries could fulfill these requirements.
Complementary currencies and deflationary crisisSehrGlobal
This essay describes the benefit of complementary currencies for the global economy. Especially in times of a deflationary crisis, as we can experience it actual with the EURO crisis, are complementary currencies valuable to ease the economical disaster. The idea of superneutralisation of monetary systems leads to the option to think about alternative monetary systems not only in local extension, as we know them from community currencies, but also in a global scale.
The content of this essay does not argue for and against local or global approaches. It wants to show, that the experiences with local and community currencies are very valuable and important in an also global scale, not only as emergency monetary systems in times of deflationary crisis. The essay wants incorporate the dynamical growth of local initiatives with new economical approaches to domesticate the big business in advance.
Following up the EURO crisis is it possible to transform parts of the mechanism of superneutralisation to the common currency area of the EURO zone. In this sense a superneutralised European currency incorporates the advantages of a common currency with the advantages of national currencies. The problems with inner European trading imbalances could be minimized due to the flexible exchange rates of this system. To reach the balance of trading is one of the main challenges to keep Europe political and economical stable. And the described measure would be that tool to reach this goal. It could help to stabilize the European economies.
Alternative monetary thinking is important. One of the great achievements of community currencies is the use of low interest currencies. The essay describes the effect of reconciliation, which is based on superneutralisation and low interest currencies, as the most reasonable tool to solve the problems of public debts. As the superneutralised EURO zone would allow the implementation of low interest national currencies, it opens a opportunity for another tool to solve the EURO debt crisis.
The subchapter “Compatibleness of low interest and interest free money in a superneutralised currency area” will deal with the orthodox tenets of the quantity theory of money and neutrality of money.
New microsoft office word document (5)Prince Naidu
The document discusses the Fisher effect, which is the proposition that the real interest rate is independent of monetary measures like nominal interest rates and expected inflation rates. It states that according to the Fisher effect, there is a one-for-one relationship between nominal interest rates and expected inflation, so that a rise in expected inflation will lead to an equal rise in nominal rates. However, some models argue that a rise in expected inflation could increase real spending and limit the increase in nominal rates needed to balance money supply and demand.
1) Statement to Quantity Theory of Money
2) Graph illustration and Pictorial description of QTM
3) Different Approaches to QTM
4) Fisher's Transaction Approach Description
5) Assumptions of Fisher's Transaction Approach
6) Conclusion
This document provides an overview of Keynes' liquidity preference theory of interest. It defines interest as payment made by a borrower to a lender for borrowing money. It distinguishes between gross and net interest. The liquidity preference theory states that interest is determined by the interaction between the demand and supply of money, where demand is based on liquidity preference and the desire to hold cash. Demand for money has three motives: transactional, precautionary, and speculative. The demand curve is negatively sloped. The supply of money is determined by the central bank and is interest inelastic. The equilibrium interest rate is determined by the point where the demand curve intersects the vertical supply curve. Changes in liquidity preference
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
This document provides an overview of the quantity theory of money. It discusses the history of the theory as outlined by Irving Fisher in 1911. Fisher examined the link between the money supply (M), price level (P), and aggregate output or income (Y). This relationship is captured in the equation of exchange: M x V = P x Y, where V is the velocity of money, or how quickly money circulates in the economy. The document then explains that according to the quantity theory, changes in the money supply will only affect the price level as long as velocity and output remain constant in the short run. Finally, it provides graphs showing how velocity has changed over time for different monetary aggregates in Egypt.
Inflation reduces the purchasing power of money over time. It is measured using indexes like the Consumer Price Index that track price changes in the economy. The quantity theory of money states that increases in the money supply by the central bank will lead to higher inflation. Unanticipated inflation can redistribute wealth in unintended ways and hurt those on fixed incomes not adjusted for inflation. High or hyperinflation above 50% per month severely distorts the economy and can cause money to lose its functions.
1. The document discusses various theories related to the quantity theory of money, including the Fisher Identity and the Cambridge Cash Balances equation.
2. It analyzes the components and assumptions of these theories, such as the transactions demand for money being proportional to aggregate transactions.
3. Criticisms of the older quantity theories are presented, including that they assumed full employment and an exogenously determined money supply, whereas Keynes argued resources are often underemployed and the money supply is endogenous.
Complementary currencies and deflationary crisisSehrGlobal
This essay describes the benefit of complementary currencies for the global economy. Especially in times of a deflationary crisis, as we can experience it actual with the EURO crisis, are complementary currencies valuable to ease the economical disaster. The idea of superneutralisation of monetary systems leads to the option to think about alternative monetary systems not only in local extension, as we know them from community currencies, but also in a global scale.
The content of this essay does not argue for and against local or global approaches. It wants to show, that the experiences with local and community currencies are very valuable and important in an also global scale, not only as emergency monetary systems in times of deflationary crisis. The essay wants incorporate the dynamical growth of local initiatives with new economical approaches to domesticate the big business in advance.
Following up the EURO crisis is it possible to transform parts of the mechanism of superneutralisation to the common currency area of the EURO zone. In this sense a superneutralised European currency incorporates the advantages of a common currency with the advantages of national currencies. The problems with inner European trading imbalances could be minimized due to the flexible exchange rates of this system. To reach the balance of trading is one of the main challenges to keep Europe political and economical stable. And the described measure would be that tool to reach this goal. It could help to stabilize the European economies.
Alternative monetary thinking is important. One of the great achievements of community currencies is the use of low interest currencies. The essay describes the effect of reconciliation, which is based on superneutralisation and low interest currencies, as the most reasonable tool to solve the problems of public debts. As the superneutralised EURO zone would allow the implementation of low interest national currencies, it opens a opportunity for another tool to solve the EURO debt crisis.
The subchapter “Compatibleness of low interest and interest free money in a superneutralised currency area” will deal with the orthodox tenets of the quantity theory of money and neutrality of money.
New microsoft office word document (5)Prince Naidu
The document discusses the Fisher effect, which is the proposition that the real interest rate is independent of monetary measures like nominal interest rates and expected inflation rates. It states that according to the Fisher effect, there is a one-for-one relationship between nominal interest rates and expected inflation, so that a rise in expected inflation will lead to an equal rise in nominal rates. However, some models argue that a rise in expected inflation could increase real spending and limit the increase in nominal rates needed to balance money supply and demand.
1) Statement to Quantity Theory of Money
2) Graph illustration and Pictorial description of QTM
3) Different Approaches to QTM
4) Fisher's Transaction Approach Description
5) Assumptions of Fisher's Transaction Approach
6) Conclusion
This document provides an overview of Keynes' liquidity preference theory of interest. It defines interest as payment made by a borrower to a lender for borrowing money. It distinguishes between gross and net interest. The liquidity preference theory states that interest is determined by the interaction between the demand and supply of money, where demand is based on liquidity preference and the desire to hold cash. Demand for money has three motives: transactional, precautionary, and speculative. The demand curve is negatively sloped. The supply of money is determined by the central bank and is interest inelastic. The equilibrium interest rate is determined by the point where the demand curve intersects the vertical supply curve. Changes in liquidity preference
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
This document provides an overview of the quantity theory of money. It discusses the history of the theory as outlined by Irving Fisher in 1911. Fisher examined the link between the money supply (M), price level (P), and aggregate output or income (Y). This relationship is captured in the equation of exchange: M x V = P x Y, where V is the velocity of money, or how quickly money circulates in the economy. The document then explains that according to the quantity theory, changes in the money supply will only affect the price level as long as velocity and output remain constant in the short run. Finally, it provides graphs showing how velocity has changed over time for different monetary aggregates in Egypt.
Inflation reduces the purchasing power of money over time. It is measured using indexes like the Consumer Price Index that track price changes in the economy. The quantity theory of money states that increases in the money supply by the central bank will lead to higher inflation. Unanticipated inflation can redistribute wealth in unintended ways and hurt those on fixed incomes not adjusted for inflation. High or hyperinflation above 50% per month severely distorts the economy and can cause money to lose its functions.
1. The document discusses various theories related to the quantity theory of money, including the Fisher Identity and the Cambridge Cash Balances equation.
2. It analyzes the components and assumptions of these theories, such as the transactions demand for money being proportional to aggregate transactions.
3. Criticisms of the older quantity theories are presented, including that they assumed full employment and an exogenously determined money supply, whereas Keynes argued resources are often underemployed and the money supply is endogenous.
This paper will show the endogenous channel of monetary policy under a Sraffian
context. That is, assuming a distributive variable as exogenous. In this case we say that
the interest rate is determined by constitutional features and is set exogenously by the
central bank to the level that it wants.
In this scheme, banks have a central role. The possibility of extending credit without
the need for prior deposits, makes them a key driver of economic growth. Since the
loan amount is determined by the demand for credit rather than deposits, the concept
of effective demand cannot be dissociated from the analysis.
The implications of monetary and fiscal policy should also not be ignored.
Irving Fisher developed the transactions approach to the quantity theory of money in his 1911 book The Purchasing Power of Money. He proposed that the price level (P) is directly proportional to the money supply (M) when the velocity of money (V) and volume of transactions (T) remain constant, as represented by his equation of exchange MV=PT. Fisher argued that an increase in the money supply would lead to a direct increase in the price level and a decrease in the value of money. While later facing criticism, Fisher's quantity theory formed the basis of understanding the relationship between money supply and price levels.
Economic project on foreign exchange for m.com part 1 Anjali Modi
The document discusses the foreign exchange market. It begins with a brief history, noting that modern foreign exchange markets originated in 1973 but that currency exchange has occurred for millennia. It then provides definitions and explanations of key terms like foreign exchange, foreign exchange market, and why the foreign exchange market is unique due to its enormous daily trading volume representing trillions of dollars worth of transactions. The document also outlines the major participants in the foreign exchange market and the types of transactions that occur.
The document discusses the quantity theory of money. It begins by explaining the basic concept that there is a direct relationship between the quantity of money in an economy and the price level. It then discusses Irving Fisher's formulation of the quantity theory through his equation of exchange. Finally, it discusses Milton Friedman's reformulation, which views the quantity theory as a theory of demand for money and emphasizes the role of wealth and asset prices in determining demand for money.
Restatement of quantity theory of moneyNayan Vaghela
Milton Friedman proposed a restatement of the Quantity Theory of Money (QTM) that incorporated permanent real income and wealth. He argued that the demand for money depends on total wealth, expected returns on various assets, and tastes/preferences. Friedman defined permanent real income as the sustainable level of income without reducing wealth over time. His equation for the QTM included factors like the money stock, the price level, permanent income, expected rates of return on different assets, and other variables. While improving on prior theories, Friedman's restatement still had limitations like subjective terms that are hard to measure and challenges maintaining a steady money supply in a modern economy.
This document summarizes theories of money demand, including the quantity theory of money and Keynes' liquidity preference theory. The quantity theory views money demand as a function of income only, while Keynes argued it depends on both income and interest rates. Later economists like Tobin and Baumol refined Keynes' model by showing transaction demand also responds to interest rates due to opportunity costs of holding money. Precautionary and speculative demand motives are likewise negatively related to interest rates.
Money: Definition, Origin, Functions, Inflation, Deflation, Value of Money, M...flowerpower_1324
These slides cover the first chapter of the B.Com "Banking and Finance" syllabus: Money.
It includes the following topics: Definition, Origin, Functions, Inflation and its remedies, , Deflation and its causes, reflation, devaluation, , Monetary and Fiscal Policy, Paper Money: its kinds and advantages and disadvanatges, Monetary system, Value of Money: quantity theory of money, cash balance approach, modern theory of money.
This document discusses the contributions of several influential economists to the development of the Quantity Theory of Money (QTM) including: Nicolaus Copernicus who first formulated the connection between money supply and price levels; Adam Smith who viewed wealth as determined by commodities not money; Irving Fisher who created the equation of exchange; Alfred Marshall who recognized money as a store of value; A.C. Pigou who modified the equation of exchange; John Maynard Keynes who viewed money as an asset and developed liquidity preference theory; Milton Friedman who believed monetary policy could control inflation and prices; and attributed the Great Depression to monetary policy mistakes.
Friedman developed a theory of demand for money that asserts it is a function of total wealth, the division of wealth between human and non-human forms, rates of return on various assets, and other influences on tastes and preferences. His demand for money function includes variables like income, asset prices, and interest rates. Empirical studies found the demand for money is stable and more related to permanent income than current income. For underdeveloped countries, demand may be interest-inelastic and influenced more by expected price changes than interest rates due to financial and economic dualism.
Determination of exchange rate chapter 6Nayan Vaghela
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
Monetary Economics-Quantity Theory of MoneySaradha Shyam
The document discusses the quantity theory of money, which attempts to explain changes in the value of money and price levels based on changes in the money supply. It introduces the demand for money, which depends on factors like income, interest rates, and transaction needs. The quantity theory is explained using Fisher's equation of exchange, which states that the total money supply (money in circulation multiplied by its velocity) equals the total value of goods and services traded (total goods multiplied by the price level). The theory argues that if velocity and output are stable, then changes in the money supply will directly impact price levels. The document notes criticisms of the quantity theory's assumptions and limitations.
Prof. J.R. Hicks proved that the general equilibrium of an economy, including the interest rate, can be determined using the IS-LM curve analysis which synthesizes the classical IS curve analysis of the real sector and the Keynesian LM curve analysis of the monetary sector. The IS curve shows the relationship between interest rates and output/employment levels that achieve equilibrium in the goods market. The LM curve shows the relationship between interest rates and income levels that achieve equilibrium in the money market from the equality of money demand and supply. The intersection of the IS and LM curves indicates the general equilibrium interest rate and income level where both the goods market and money market are in equilibrium.
Keynes and Friedman had differing views on the demand for money. Keynes believed demand depended on transactions, precautionary, and speculative motives related to income and interest rates. Friedman saw demand as stable, depending on permanent income and expected returns of money versus assets. While Keynes saw fluctuating velocity, Friedman's modern quantity theory viewed money as the primary driver of spending with predictable velocity.
1. The IS-LM model analyzes the relationship between the goods market and money market in an economy.
2. Fiscal policy changes shift the IS curve, which represents goods market equilibrium. Monetary policy changes shift the LM curve, which represents money market equilibrium.
3. When both curves shift simultaneously, the impact on interest rates and income is unpredictable and depends on the direction of the shifts.
The Quantity Theory of Money states that there is a direct relationship between the amount of money in circulation in an economy and the general price level. Specifically:
1) As the quantity of money increases, the price level also increases, leading to inflation.
2) Irving Fisher elaborated on this theory in his 1911 work "Purchasing Power of Money" by introducing the Equation of Exchange: M * V + M' * V' = P * T, which relates the money supply, velocity of money, output, and the price level.
3) The theory is based on assumptions like the velocity of money and transactions remaining constant, but it has been criticized for not explaining cyclical price changes and
Keynes' liquidity preference theory holds that individuals and firms demand to hold cash, or liquidity, for three main motives: transaction, precautionary, and speculative. The transaction motive refers to holding cash for daily transactions, while the precautionary motive involves holding cash as a buffer against unexpected events. The speculative motive refers to holding cash in order to take advantage of anticipated price changes in bonds and securities. Together these three motives determine the overall demand for money, or liquidity preference, in the economy. The interest rate is determined by the interaction of liquidity preference and the fixed money supply. When liquidity preference is very high, so that demand for money vastly exceeds supply even at very low interest rates, monetary policy
The objective of this paper is to test the exchange rate dynamics by measuring the speed of adjustment of prices. In this overshooting model, we assume price stickiness (gradual adjustment). If the prices are adjusted instantaneously, we will have the monetarist view; otherwise, the overshooting one, due to slow adjustment of prices and consequently, it affects all the other variables and slowly the exchange rate. We outline, here, an approach of testing the dynamic models of exchange rate determination. This approach is based upon the idea that it is difficult to measure directly the process by which market participants revise their expectations about current and future money supplies. On the other hand, it is possible to make indirect inferences about these expectations through a time series analysis of related financial and real prices. Empirical tests of the above exchange rate dynamics are taking place for four different exchange rates ($/€, $/£, C$/$, and ¥/$). Theoretical discussion and empirical evidence have emphasized the impact of gradual adjustment and “overshooting” that it is taking place. Only for the $/€ exchange rate the monetarist model is correct.
1) The document discusses the monetary model of exchange rates and its predictions. The model predicts that exchange rates will follow the relative money supplies and inflation rates of the two currencies.
2) The model assumes that real money demand is constant, but evidence shows that money demand decreases with higher interest rates. This means the original model is too simplistic.
3) When updated to reflect interest rate effects on money demand, the model implies exchange rates, inflation rates, and interest rates will equalize in the long run between countries according to purchasing power parity and uncovered interest rate parity.
This document provides an overview of international financial markets and linkages, including:
- The Eurodollar market, which began in the 1950s and increased in importance due to factors like oil shocks in the 1970s.
- International bond and stock markets, which have facilitated greater international capital mobility and interdependence as well as spread of financial crises.
- Basic models of international financial linkages based on interest rate parity and how a change in domestic interest rates would impact markets.
- Derivatives markets that have emerged to hedge foreign exchange and interest rate risk, though cannot eliminate risk as shown by the global financial crisis.
The document discusses how the velocity of money circulation impacts the stability of the money supply. It states that the velocity of money, representing how frequently each monetary unit is used, is inversely related to the amount of money in circulation. A higher velocity means money is turning over more quickly in the economy. This can lead to inflation if the money supply is not appropriately adjusted to match the level of goods and services. Central banks aim to regulate the money supply and target appropriate levels to achieve economic goals like stable prices or growth. They do this primarily by conducting transactions that directly control the monetary base and broader aggregates.
A review of empirical studies on money supply at abroad and in indiaAlexander Decker
The document summarizes several studies on money supply from abroad. It discusses theories and empirical analyses of money supply from the 1920s to the 1970s. Key points discussed include the money multiplier theory, factors influencing money supply like monetary base, reserve ratios, and excess reserves, as well as debates between monetarist and post-Keynesian views on the determinants and controllability of money supply. The document also reviews empirical analyses of money supply processes in various countries and time periods.
This paper will show the endogenous channel of monetary policy under a Sraffian
context. That is, assuming a distributive variable as exogenous. In this case we say that
the interest rate is determined by constitutional features and is set exogenously by the
central bank to the level that it wants.
In this scheme, banks have a central role. The possibility of extending credit without
the need for prior deposits, makes them a key driver of economic growth. Since the
loan amount is determined by the demand for credit rather than deposits, the concept
of effective demand cannot be dissociated from the analysis.
The implications of monetary and fiscal policy should also not be ignored.
Irving Fisher developed the transactions approach to the quantity theory of money in his 1911 book The Purchasing Power of Money. He proposed that the price level (P) is directly proportional to the money supply (M) when the velocity of money (V) and volume of transactions (T) remain constant, as represented by his equation of exchange MV=PT. Fisher argued that an increase in the money supply would lead to a direct increase in the price level and a decrease in the value of money. While later facing criticism, Fisher's quantity theory formed the basis of understanding the relationship between money supply and price levels.
Economic project on foreign exchange for m.com part 1 Anjali Modi
The document discusses the foreign exchange market. It begins with a brief history, noting that modern foreign exchange markets originated in 1973 but that currency exchange has occurred for millennia. It then provides definitions and explanations of key terms like foreign exchange, foreign exchange market, and why the foreign exchange market is unique due to its enormous daily trading volume representing trillions of dollars worth of transactions. The document also outlines the major participants in the foreign exchange market and the types of transactions that occur.
The document discusses the quantity theory of money. It begins by explaining the basic concept that there is a direct relationship between the quantity of money in an economy and the price level. It then discusses Irving Fisher's formulation of the quantity theory through his equation of exchange. Finally, it discusses Milton Friedman's reformulation, which views the quantity theory as a theory of demand for money and emphasizes the role of wealth and asset prices in determining demand for money.
Restatement of quantity theory of moneyNayan Vaghela
Milton Friedman proposed a restatement of the Quantity Theory of Money (QTM) that incorporated permanent real income and wealth. He argued that the demand for money depends on total wealth, expected returns on various assets, and tastes/preferences. Friedman defined permanent real income as the sustainable level of income without reducing wealth over time. His equation for the QTM included factors like the money stock, the price level, permanent income, expected rates of return on different assets, and other variables. While improving on prior theories, Friedman's restatement still had limitations like subjective terms that are hard to measure and challenges maintaining a steady money supply in a modern economy.
This document summarizes theories of money demand, including the quantity theory of money and Keynes' liquidity preference theory. The quantity theory views money demand as a function of income only, while Keynes argued it depends on both income and interest rates. Later economists like Tobin and Baumol refined Keynes' model by showing transaction demand also responds to interest rates due to opportunity costs of holding money. Precautionary and speculative demand motives are likewise negatively related to interest rates.
Money: Definition, Origin, Functions, Inflation, Deflation, Value of Money, M...flowerpower_1324
These slides cover the first chapter of the B.Com "Banking and Finance" syllabus: Money.
It includes the following topics: Definition, Origin, Functions, Inflation and its remedies, , Deflation and its causes, reflation, devaluation, , Monetary and Fiscal Policy, Paper Money: its kinds and advantages and disadvanatges, Monetary system, Value of Money: quantity theory of money, cash balance approach, modern theory of money.
This document discusses the contributions of several influential economists to the development of the Quantity Theory of Money (QTM) including: Nicolaus Copernicus who first formulated the connection between money supply and price levels; Adam Smith who viewed wealth as determined by commodities not money; Irving Fisher who created the equation of exchange; Alfred Marshall who recognized money as a store of value; A.C. Pigou who modified the equation of exchange; John Maynard Keynes who viewed money as an asset and developed liquidity preference theory; Milton Friedman who believed monetary policy could control inflation and prices; and attributed the Great Depression to monetary policy mistakes.
Friedman developed a theory of demand for money that asserts it is a function of total wealth, the division of wealth between human and non-human forms, rates of return on various assets, and other influences on tastes and preferences. His demand for money function includes variables like income, asset prices, and interest rates. Empirical studies found the demand for money is stable and more related to permanent income than current income. For underdeveloped countries, demand may be interest-inelastic and influenced more by expected price changes than interest rates due to financial and economic dualism.
Determination of exchange rate chapter 6Nayan Vaghela
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
Monetary Economics-Quantity Theory of MoneySaradha Shyam
The document discusses the quantity theory of money, which attempts to explain changes in the value of money and price levels based on changes in the money supply. It introduces the demand for money, which depends on factors like income, interest rates, and transaction needs. The quantity theory is explained using Fisher's equation of exchange, which states that the total money supply (money in circulation multiplied by its velocity) equals the total value of goods and services traded (total goods multiplied by the price level). The theory argues that if velocity and output are stable, then changes in the money supply will directly impact price levels. The document notes criticisms of the quantity theory's assumptions and limitations.
Prof. J.R. Hicks proved that the general equilibrium of an economy, including the interest rate, can be determined using the IS-LM curve analysis which synthesizes the classical IS curve analysis of the real sector and the Keynesian LM curve analysis of the monetary sector. The IS curve shows the relationship between interest rates and output/employment levels that achieve equilibrium in the goods market. The LM curve shows the relationship between interest rates and income levels that achieve equilibrium in the money market from the equality of money demand and supply. The intersection of the IS and LM curves indicates the general equilibrium interest rate and income level where both the goods market and money market are in equilibrium.
Keynes and Friedman had differing views on the demand for money. Keynes believed demand depended on transactions, precautionary, and speculative motives related to income and interest rates. Friedman saw demand as stable, depending on permanent income and expected returns of money versus assets. While Keynes saw fluctuating velocity, Friedman's modern quantity theory viewed money as the primary driver of spending with predictable velocity.
1. The IS-LM model analyzes the relationship between the goods market and money market in an economy.
2. Fiscal policy changes shift the IS curve, which represents goods market equilibrium. Monetary policy changes shift the LM curve, which represents money market equilibrium.
3. When both curves shift simultaneously, the impact on interest rates and income is unpredictable and depends on the direction of the shifts.
The Quantity Theory of Money states that there is a direct relationship between the amount of money in circulation in an economy and the general price level. Specifically:
1) As the quantity of money increases, the price level also increases, leading to inflation.
2) Irving Fisher elaborated on this theory in his 1911 work "Purchasing Power of Money" by introducing the Equation of Exchange: M * V + M' * V' = P * T, which relates the money supply, velocity of money, output, and the price level.
3) The theory is based on assumptions like the velocity of money and transactions remaining constant, but it has been criticized for not explaining cyclical price changes and
Keynes' liquidity preference theory holds that individuals and firms demand to hold cash, or liquidity, for three main motives: transaction, precautionary, and speculative. The transaction motive refers to holding cash for daily transactions, while the precautionary motive involves holding cash as a buffer against unexpected events. The speculative motive refers to holding cash in order to take advantage of anticipated price changes in bonds and securities. Together these three motives determine the overall demand for money, or liquidity preference, in the economy. The interest rate is determined by the interaction of liquidity preference and the fixed money supply. When liquidity preference is very high, so that demand for money vastly exceeds supply even at very low interest rates, monetary policy
The objective of this paper is to test the exchange rate dynamics by measuring the speed of adjustment of prices. In this overshooting model, we assume price stickiness (gradual adjustment). If the prices are adjusted instantaneously, we will have the monetarist view; otherwise, the overshooting one, due to slow adjustment of prices and consequently, it affects all the other variables and slowly the exchange rate. We outline, here, an approach of testing the dynamic models of exchange rate determination. This approach is based upon the idea that it is difficult to measure directly the process by which market participants revise their expectations about current and future money supplies. On the other hand, it is possible to make indirect inferences about these expectations through a time series analysis of related financial and real prices. Empirical tests of the above exchange rate dynamics are taking place for four different exchange rates ($/€, $/£, C$/$, and ¥/$). Theoretical discussion and empirical evidence have emphasized the impact of gradual adjustment and “overshooting” that it is taking place. Only for the $/€ exchange rate the monetarist model is correct.
1) The document discusses the monetary model of exchange rates and its predictions. The model predicts that exchange rates will follow the relative money supplies and inflation rates of the two currencies.
2) The model assumes that real money demand is constant, but evidence shows that money demand decreases with higher interest rates. This means the original model is too simplistic.
3) When updated to reflect interest rate effects on money demand, the model implies exchange rates, inflation rates, and interest rates will equalize in the long run between countries according to purchasing power parity and uncovered interest rate parity.
This document provides an overview of international financial markets and linkages, including:
- The Eurodollar market, which began in the 1950s and increased in importance due to factors like oil shocks in the 1970s.
- International bond and stock markets, which have facilitated greater international capital mobility and interdependence as well as spread of financial crises.
- Basic models of international financial linkages based on interest rate parity and how a change in domestic interest rates would impact markets.
- Derivatives markets that have emerged to hedge foreign exchange and interest rate risk, though cannot eliminate risk as shown by the global financial crisis.
The document discusses how the velocity of money circulation impacts the stability of the money supply. It states that the velocity of money, representing how frequently each monetary unit is used, is inversely related to the amount of money in circulation. A higher velocity means money is turning over more quickly in the economy. This can lead to inflation if the money supply is not appropriately adjusted to match the level of goods and services. Central banks aim to regulate the money supply and target appropriate levels to achieve economic goals like stable prices or growth. They do this primarily by conducting transactions that directly control the monetary base and broader aggregates.
A review of empirical studies on money supply at abroad and in indiaAlexander Decker
The document summarizes several studies on money supply from abroad. It discusses theories and empirical analyses of money supply from the 1920s to the 1970s. Key points discussed include the money multiplier theory, factors influencing money supply like monetary base, reserve ratios, and excess reserves, as well as debates between monetarist and post-Keynesian views on the determinants and controllability of money supply. The document also reviews empirical analyses of money supply processes in various countries and time periods.
BBA 2401, Principles of Macroeconomics 1 Learning Obj.docxarnit1
BBA 2401, Principles of Macroeconomics 1
Learning Objectives
Upon completion of this unit, students should be able to:
1. Describe the relationship between the demand and supply of money.
2. Explain how changes in the money supply affect aggregate demand in
the short run.
3. Explain how changes in the money supply affect aggregate demand in
the long run.
4. Evaluate targets for monetary policy.
5. Compare an active policy and a passive policy.
6. Explain the Phillips curve.
Written Lecture
Monetary theory is concerned with the effects of the quantity of money on the
economy's price level and the level of real output. There is considerable debate
among economists concerning what these effects are. One difficulty in
determining the effects is that monetary policy changes and fiscal policy
changes often occur at the same time, so it is difficult to sort out the effects of
one from those of the other. This chapter describes two views of how money
affects the economy: a short-run view and a long-run view.
The Demand and Supply of Money
A person's demand for money is not the same as the person's desire for a
greater income. When economists speak of a demand for money, they are
referring to the desire to hold a particular amount of money, either in checking
accounts or as cash. That is, the demand for money is a demand to hold a
stock of money at a particular time. Since money is used to facilitate exchange
of goods and services and people engage in exchange on a regular basis,
people hold money balances. The demand for money is greater the greater the
number of transactions (as measured by real GDP) and the higher the average
price at which each good is sold, that is, the greater nominal GDP.
Money also competes with other financial assets as a store of wealth.
Compared with other financial assets, money has one major advantage and
one major disadvantage. Money's advantage is its liquidity—it can be directly
exchanged for goods and services. Its disadvantage is that it earns either no
interest or substantially less interest than other financial assets. The
opportunity cost of holding money is the additional interest that could have
been earned by using the money to buy alternative interest-bearing financial
assets. Consequently, the cost of holding money increases with the real
interest rate, and we expect the demand for money to vary inversely with the
real interest rate, other things being constant. That is, the demand curve for
money slopes downward when real interest rates are on the vertical axis.
Reading
Assignments
Chapter 16:
Monetary Theory and
Policy
Chapter 17:
Macro Policy Debate:
Active or Passive?
Supplemental
Reading
Click here to access a
PDF of the Chapter 16
Presentation.
Click here to access a
PDF of the Chapter 17
Presentation.
Learning Activities
(Non-Graded)
See information below.
Key Terms
1. Decision-making lag
2. De ...
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2. Introduction
The global financial crisis gives the feeling to look onto the unbridled capitalism. It
forces to spend time and to think more about the causal relationships of market
failures. It leads inevitably to the global monetary system and let assume that this
monetary system and therewith this kind of capitalism cannot be sustainable. The
conclusion is that the world requires new and holistic ideas of improvement and
changes. One utopian idea to improve and to change our monetary system is
described in the essay
“Model of a neutralised currency and exchange system for central banks”
Part I - Introduction”1)
This monetary model is abbreviating named ANNA. It is the consideration of
monetary systems from a different point of view in approach to the parable of the
workers in the vineyard2). It is the concept of a global system and therewith
addressed to the world society as a question of an ethical vision of economy. It is the
vision that economy has to act for the life as an absolute and unalterable value.
It is a challenge of the world society to enable an agreement by settling a monetary
system which will be a statement for life and justice.
The first essay of ANNA explained the vision of ethical and philosophical aspects, as
also the principle functionality of the monetary model. It is a rather general
description and requires obviously more detailed explanations. This second essay
wants to look more in detail to the functionality and application of ANNA.
The main property of ANNA is superneutrality which is the agreement of a never
changing value which represents the unit of the world and the interdependence of
economies.
The first chapter of this second essay describes properties which are arising from the
superneutrality. The second chapter deals with the fact that such a system will only
find limited acceptance. It describes the introduction of an incomplete currency area
and gives a short preview of the effect of reconciliation.
We have to realize that the world economy is an extremely large and complex system
with countless transactions and a huge number of participants. It is impossible to
describe this system adequately and makes it difficult to predict how a new way of
thinking influences the system. Therefore is this essay an invitation to take up the
subject and to verify the statements.
page 2 of 19
3. 1) ANNA – properties of superneutrality
ANNA is a currency exchange rate regime
ANNA is a mathematical description of the relationship between currencies. It is a
simple ratio equation. The counter represents the value. The divider represents the
amount of all money of all currencies, named as world money supply.
Figure 1) mathematical description of the world monetary system by ANNA
As this equation characterize a relationship and not the currencies themselves, price
formation is not effected and all exchange rates are shown as possible. It can be
assumed that the equation is applicable.
The idea of ANNA connects all currencies in one equation together. This means that
all exchange rates are determined mathematically and are consistent to each other.
In that way the introduction of a fixed exchange rate regime will be allowed. By
enshrining currencies to the never changing value of ANNA and the usage of money
supply and exchange rates as variables, the exchange rate determination should be
able to follow the market flexible and always conclusive.
If the idea of the monetary system will find support, the implementation of it will move
between 3 phases of development, introduction and consolidation
page 3 of 19
4. Phase of development:
It is a scan of the system for feasibility by observing the foreign exchange markets,
where the monetary system of ANNA is not involved yet. At the same time it will be
the preparation of the infrastructure for the associated countries and the responsible
institutes. Responsiveness, flexibility and accuracy of exchange rates must be
reviewed. Rounding errors require perhaps thoughts about a change in the counter to
get a number x world money supply. Tthe introduction in the associated countries
must be well prepared, too.
Phase of introduction
It must be expected that only a small group of countries will participate in the system
of ANNA, in a so called incomplete currency area. The exchange rates and the share
onto ANNA should be settled for the associated currencies in a system of
complementary currencies with different properties. The main task of the intermediary
working complementary currencies is debt control. By that heavily indebted
developing countries and their main creditors will probably pay attention first. The
introduction of the incomplete currency area will be the subject of the second chapter.
Phase of consolidation
It is not evident that the causes of the financial crisis could be resolved. We must
therefore assume that the crisis will return. Each return will increase the costs and
operative expenses. This is the previous experience we made with the existing
system of unbridled capitalism. Even large economies could run into the problem not
being able to grow out of their debts. If the incomplete currency area proves to be a
stabilizing system, other economies will go into the system, even large economies in
distress. The system in perfection will be achieved, if all currencies participate onto
ANNA. A complete currency area allows the implementation of single global
currency. But the phase of consolidation is not a subject of this essay.
ANNA is valuation of currencies
The already existing exchange rates are called conventional exchange rates. These
are available for trading on the foreign exchange markets. The term exchange rate in
this essay has a different meaning and is defined as the share of one unit of one
currency onto ANNA.
The share onto ANNA can be considered as a kind of valuation of currencies.
In the phase of development the share will be reactive determined by conventional
exchange rates and money supply of central banks. These numbers already exist.
In the phase of introduction and consolidation, the share of associated currencies
onto ANNA must be fixed. At the time when the phase of introduction and
consolidation start, the latest reactive determined values of the phase of
development will be fixed. The adaptability of the individual currencies will remain
due to the variables of monetary supply and exchange rates. Monetary policies of
associated countries will be still possible by money supply. The fixation of the share
page 4 of 19
5. onto ANNA causes no disadvantages, but will be necessary to enable the effect of
reconciliation. It is an effect of balancing which occurs on transaction between
currencies.
The fixation of share requires the approval of the participating countries. It can be
considered as an international agreement which declares individual economies as
constants and it will be manifested by the equations of exchange rate determination
changing from the equation in figure 1) to equation in figure 2).
Figure 2) valuation of currencies
ANNA is money transformation
The conclusive exchange rates, the introduction of share onto ANNA and the
introduction of liabilities l and receivables r in the equation of exchange rate
determination in figure 2) allow money exchange by transformation from one
currency into the other. This impedes the creation of foreign currency reserves and
additional money supply resulting from the exchange.
page 5 of 19
6. ANNA is total interaction between currencies
Money supply x, foreign receivables r and foreign liabilities l are the variables
which are influencing the exchange rates. Figure 3 shows how the variables influence
the exchange rates. The increase of x and r leads to an increase of the exchange
rates, while the increase of l leads to a decrease of exchange rates. The decrease
of x and r leads to an decrease of the exchange rates, while the decrease of l
leads to an increase of exchange rates
It is impossible to predict exactly the behaviour of the exchange rates, because
markets continue with myriads of transactions and many of them are linked together
in series of interactions. But it can be estimated, that the transactions and series of
interactions constrain to some kind of balancing effects, named as effect of
reconciliation. For example it must be assumed that deficit spending leads
somewhere on debtors side to an increase of liabilities l or/and further money
supply x and therewith to a decrease of the exchange rates. It is a task of the phase
of development to get a better understanding of the interactions onto the exchange
rates and their influences onto economies.
Figure 3) influence of transactions onto exchange rates
page 6 of 19
7. ANNA is valorisation of interest free money
Money supply and credits are chained together by fractional reserve banking. The
exponential growth of money supply is caused by the exponential growth of
receivables and liabilities, considered as the accumulation of all credits in an
economy. The exponential growth of debts on the other hand is caused by interest
and interest compound.
Money supply influences the exchange rates in the monetary system of ANNA. The
exponential growth of money supply for conventional interest based money leads to
an inverse exponential decrease of the exchange rates, as shown in figure 4).
But the relation between the applied currencies keeps the same, as long as the
growth of money supply for all currencies keeps the same. Applied currencies are
currencies which will be also used for visible trading.
Interest free money, as described by Silvio Gesell 2), has no or low interest rates. The
Money supply won´t increase exponential. In dependence of economically demands
and due to the demurrage fee, money supply will only have small variations around a
stable line, as shown in figure 7). If it will get possible to operate with an interest free
currency independent and unlinked to conventional currency, the exchange rate of
the interest free currency will keep also more or less stable, as shown in figure 4).
This could turn around the appreciation of the interest based and interest free
currencies. Because in a long term consideration an interest based currency will lose
and an interest free currency will keep its purchasing power. The spread in the
exchange rate between interest based and interest free currencies is important for
debt control.
The exponential growth of debts is also called the helix of debt or the trap of debts.
Credits are important for money circulation and cannot be impeded. But it would be
the simplest way to interrupt the helix of debt, if interest and interest compound will
be avoided. An Interest free currency fulfils this requirement, especially if it will be
traded in the environment of the monetary system of ANNA which ensures
independent exchange rates. The spread of exchange rates, as shown in figure 4) is
probably the most important effect of reconciliation. The whole world is involved in
the game with receivables and liabilities. It can be named debt crises. Nobody knows
where it leads to. It is perhaps helpful to take attention of this effect of reconciliation.
The inverse exponential decrease of the exchange rates for interest based money
could be seen as a mathematical expression of inflation. But it must be assumed, too,
that the real inflation is probably lower due to deflationary effects of capital
concentration. Capital concentration is an effect of interest and interest compound
which leads to increasing change of liquidity into speculative investments. These
speculative investments can be seen as a special kind of hoarding money which will
reduce demands in visible trading by decreasing purchasing power of people with low
income which are the majority. This influences the price formation for daily life goods
and leads therewith to the deviation between the calculated and real inflation rates.
page 7 of 19
8. Figure 4) timeline of relative exchange rates for interest based and interest free currencies
Interest and interest compound can be seen as the most significant systemic cause
for the unbridled capitalism. For all those who share this opinion is interest free
money the most effective tool to domesticate capitalism. But interest free currencies
will keep an appendix of the existing system, as long as their exchange rates belong
to interest based currencies. It is a feature of the monetary system of ANNA which
allows the independent development of interest free money in a global scale and
demonstrates therewith new options to solve the problems of the debt crisis.
ANNA allows the creation of independent interest free currencies
page 8 of 19
9. 2) Incomplete currency area
It cannot be expected that all currencies worldwide will join the currency and
exchange system of ANNA. Nevertheless, to join ANNA is also possible for a small
number of countries, even if they are not geographically connected. In this case is it
an incomplete currency area and the mathematical description of ANNA must be
adapted. Counter and divider have to be variable for every imaginable situation
where countries will join or leave the common currency area of ANNA. The change of
mathematical description has to respect that superneutrality keeps conclusive.
Figure 5) share of the incomplete currency area onto ANNA
The not changing value of the share onto ANNA and the fixed exchange rates are
important properties to guarantee stability and independence also for an incomplete
currency area. This can be used to develop economies more independent. More
independence means more protection against speculative offenses of the financial
markets and exploitation caused by the dictation of debts. It leads to more justice for
debtors. The most affected Debtors are heavily indebted poor countries. As already
mentioned, in the earliest step ANNA could perhaps find attention in these
developing countries.
page 9 of 19
10. Inside and outside trading
Inside trading means the trading between countries which are associated in the
currency area. Outside trading means the trading between associated and non
associated countries. ANNA allows the construction of a new monetary system,
where inside currencies are forced to superneutrality and outside currencies are
considered as one common currency and trading imbalances will be compensated by
self-balancing of exchange rates. The process of development and equilibration will
be improved by using complementary currencies4).
The currency area of ANNA enables the complete transformation into an
alternative monetary system with complementary currencies
The main target of an alternative monetary system with complementary currencies
and their interaction is sustainability in the best way of its meaning for economical,
ecological and social common life. A system of complementary currencies will be
preliminary characterized in the following:
ANNA5) ensures superneutrality. It is the essential property for sustainability in the
monetary system. Other functions are exchange rate determination and
transformation of inside currencies.
LINA5) is an applied currency. It is only inside valid. Its creation is based on credits. It
should be used with circulation protection as low or free of interest inside national
currencies and can lead in advance to a single global currency. LINA is an important
tool for debt control and wants to be an alternative to already existing national
currencies.
TINA5) is time money for the store of values. It is only inside valid and its creation is
based on work. It must be exchanged into LINA to be applied as currency. TINA’s
task is the initiation of income by (voluntary) work to support the transition phase. It is
also a time account to support social systems in the field of culture, education, health
and pension
FENA5) is money for the foreign exchange market and only valid for outside trading.
Its creation is based on exchange. It is interest based and requires the function of a
central bank. FENA keeps the attributes of conventional money that foreign markets
can maintain their behaviour. It ensures trading between inside and outside
economies and enables the trading of foreign assets and foreign liabilities. It
represents the foreign markets on the incomplete currency area and the incomplete
currency area on the foreign exchange markets.
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11. Figure 6) system of complementary currencies for an incomplete currency area
LINA => interest free money for the everyday business
Due to the behaviour of inversion6), ANNA can only be used as a medium of currency
exchange and monetary stabilization, but not as money for visible trading. The
everyday use of money must be done by already existing national currencies or even
better by a circumspect movement into better performing alternative currencies.
Especially free money3) is a suitable instrument to empower exploited countries to
self-determined and independent development. Interest free money must be used
with a demurrage fee. The demurrage fee keeps money in circulation. The absence
of interest and interest compound interrupts the exponential growth of money supply
and therewith also interrupts the helix of debt increase. Money supply changes into a
more or less horizontal line - as shown in figure 7). The absence of interest also
prevent from the automatism of reallocation in direction to the concentrated capital.
A currency based on interest free money will be abbreviating named LINA which
means the plural of national interest free inside currencies.
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12. Figure 7) interest free money on the monetary time beam shows no exponential growth
Due to the demurrage fee, LINA loses the attribute to be a store of value. This leads
to a different understanding of money. The appreciation of ground, goods and work
increases, the appreciation of money on itself decreases. The saving of money loses
on importance while the circulation speed of money increases. The focus of
properties changes from virtual money to the reality. This could be seen as a
paradigm shift in the utilization of economy.
The administration of money remains at the bank system. Money supply will be done
by credits like now and price accruement behaves in the same way like now. This are
all mechanism like already existing for conventional currencies.
Implementation shock
The transitional phase, as indicated in figure 7), is the change to alternative monetary
systems. It will probably lead to reaction of rich money owners, indicated as
implementation shock. To attenuate the shock need slow circumspect migration of
LINA by microcredits and wages for public services. LINA should slowly dislodge
conventional national currencies. To support the incomplete currency area in the
phase of implementation shock it requires probably additional money supply based
on work.
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13. TINA => money for the store of values
Economy, all human assets and human civilisation are based on work. It is the
important value for all societies. Work is based on force and time. Therefore force as
indicator of human time consumption and the time itself can be taken as valuation for
the effort of work and used as savings of this effort – it is the principle idea of time
money. Spending (voluntary) time for cultural and social works can be waged by time
savings. This time savings are receivables to the community to pay back the
borrowed force and time in form of also cultural and social welfare. It is a kind of
money and can be used as a basic account system to create or improve national
pension fund, public health care systems or promotion of cultural life.
A currency based on time money will be abbreviating named TINA. TINA means the
plural of national inside time currencies.
Figure 8) time money is support of transition
Money supply of TINA will be done by work. Especially heavily indebted developing
countries which are not able to spend further credit based money for the growth of
demand can use it to support national income. TINA should not be used as applied
currencies. But it is necessary to permit the exchange into LINA to utilize TINA for
deficit spending. This is important for the transitional phase to attenuate the
implementation shock. TINA and the effect of reconciliation will help economies to
recover from the implementation shock.
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14. In a long term view is TINA an allocation of welfare, because it will change into an
accounting system for cultural life, pensions and health insurance.
The share of TINA onto the whole system must be carefully influenced by wages,
exchange rates and exchange fees between time money and LINA, restrictions in
propagation, in ownership respectively transfer of ownership and limitation of savings
in time money. If an approximately equalization of (voluntary) work valuation between
inside economies is reached, national TINA’s can be transformed into one global
welfare currency.
FENA => money for foreign exchange markets
To keep the protection of superneutralisation effective, all inside currencies are only
valid inside the currency area. This belongs to currencies like LINA and TINA, but
also to remaining or slowly transforming standard national currencies. By this the
trading from and into outside foreign markets and the access to the global financial
markets must be done with a further complementary currency. This currency will be
used for the money exchange between inside and foreign currencies and is
abbreviating named FENA.
FENA represents inside currencies as one single global currency
on the foreign exchange markets.
From the perspectives of the global financial markets, FENA represents the imperfect
currency area. FENA is the valid currency for the global financial markets. They are
not used to handle complementary currencies like LINA or TINA. FENA has to
behave like each foreign standard currency with interest rates, monetary policy by a
central bank and options for trading its own treasury bonds. The global financial
markets can maintain their behaviour.
FENA represents the basket of outside currencies
on the inside currency area.
FENA is not valid as inside used currency. From the perspectives of the inside
currency area, FENA represents the share of the global financial markets onto
ANNA, as long as the share S in of the incomplete currency area onto ANNA keeps a
minority of the world money supply.
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15. Figure 9) exchange rate determination of FENA
FENA is a complementary currency with the task of exchanging and saving money.
The responsible institutions of the world community must try to establish an
exchange rate regime for FENA as described in figure 9).
The exchange rate of FENA will be determined as the share of basket of all outside
currencies onto ANNA. Conventional exchange rates of outside currencies and FENA
will be reactive determined by trading on the global financial markets. Therewith the
exchange rates of the single outside currencies SOC keeps volatile.
FENA can only be created by money exchange into savings and loans from both
sides. Inside currencies will be transformed into FENA, outside foreign currencies will
be exchanged into FENA and hold as reserves at the central bank. Inside traded
savings and loans have no influence onto the share onto money supply u out. Outside
traded savings rin and loans lin will influence the share onto money supply uout,
because foreign currency reserves are receivables which increase the share of the
incomplete currency area on world money supply. Treasury bond issues are liabilities
which decrease the share on world money supply.
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16. Scale of debt control
The more the share Sin increases the less are the global financial markets able to
ignore the incomplete currency area. This enables associated heavily indebted poor
countries to exchange their liabilities from foreign currencies into FENA. This will
support a better self-determined control of debts.
The share SinK for the incomplete currency area onto ANNA could perhaps change to
negative values, if only a few and very heavily indebted poor countries will participate
to the incomplete currency area, because SinK is influenced by the loans lin. The
closer the share SinK comes to zero the more intervention from the responsible
institutes is necessary. It will start with import taxes and will lead to a debt
moratorium with the abatement of debts.
Figure 10) levels of intervention to control public debts
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17. 3) Effect of reconciliation
The incomplete currency area can work like a complete currency area, if FENA is
implemented and used to represent the basket of all outside currencies. It embeds
the foreign exchange markets in the incomplete currency area and allows the
application of superneutrality. Therewith only money supply x, foreign receivables
r and foreign liabilities l will influence the exchange rates, indicated in figure 3).
As already mentioned, it is impossible to predict exactly the behaviour of the
exchange rates, because markets continue with myriads of transactions and many of
them are linked together in series of interactions. But it can be assumed that the
transactions and series of interactions constrain to some kind of balancing effects,
named as effect of reconciliation. The following is a brief overview of the presumed
effects.
Exchange rate fluctuations:
Foreign exchange markets are extremely volatile and conventional exchange rates
swings sharp and frequently. The conventional exchange rates between FENA and
the single outside currencies will keep volatile. But the exchange rate of the basket of
all outside currencies to ANNA will slow down due to balancing effect of the basket
and the inertia of money supply. The exchange rates of inside currencies will remain
constant in dependence of money supply x, foreign receivables r and foreign
liabilities l.
Trading imbalances
It can be presumed, that the monetary system of ANNA behaves compensative. It
means that trading deficits lead to decreasing exchange rates, while trading surplus
lead to increasing exchange rates, because on one side of the trading will increase
the foreign receivables r and on the other side the liabilities l.
Flight of capital
Especially with the implementation of LINA must be expected that the flight of capital
will dramatically increase. It can be presumed, that the system of ANNA will behave
compensative, because the flight of capital leads to monetary restraint and influences
money supply. It probably increases the exchange rates of the affected currencies.
Trap of debts
Credits and fractional reserve banking are the tools for money supply. The helix of
debts keeps uninfluenced as long as all currencies have comparable money supply
due to interest rates. It can be assumed that the helix of public debts will interrupt for
countries which change from conventional currencies to LINA. The debts still have to
be repaid, but rising costs of interest and interest compound will be eliminated by the
spread of the exchange rates between LINA and conventional currencies – as
indicated in figure 4).
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18. Figure 11) – summary
Like every idea for the regulation of financial markets also ANNA will move parts of
the profit expectations from individual money owners back to the society. This is
contrary to the philosophy of financial markets. All current political efforts indicate that
the markets are able to impede successfully any kind of regulation and loss of profit
expectations. If still small and smallest changes are not accepted, a solution like
ANNA must keep for sure a vision. Nevertheless the understanding and behaviour of
the financial markets distribute the global income more and more to the rich, which
leads unavoidable to injustice for the others. Parts of the world must suffer, especially
poor developing countries. Also natural resources will be unreasonable exploited. In
a long term view injustice and ecocide cannot be sustainable. It will cause reactions
of suffering peoples, societies and environment. Violence is the usual answer, but not
the solution. It requires more intelligent ideas. This essay wants to initiate a further
position in the discussion of better solutions for a better world.
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19. Appendix
1. availability of the essay “model of a neutralised currency and exchange
system for central banks - part I introduction “ at
http://www.slideshare.net/SehrGlobal/model-of-a-neutralised-currency-and-
exchange-system-for-central-banks
2. Similarities to the parable “workers in the vineyard”
new testament Mt 20, 1-16
3. Interest free money, also named free-money
a theory of Silvio Gesell (*1862 +1930)
introduction in English:
Margrit Kennedy: Interest and Inflation Free Money
(Published by Seva International; ISBN 0-9643025-0-0;) or
http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1.htm
4. complementary currency (CC) is a currency which is meant to be used as
complement to a national currency… see
http://en.wikipedia.org/wiki/Complementary_currency or
http://en.wikipedia.org/wiki/Bernard_Lietaer
5. The names of the proposed complementary currencies are taken arbitrary..
NA = National Apportionment or NAtional currency
AN.. = All Nations
LI.. = Low Interest money
TI.. = TIme money
FE.. = money for Foreign Exchange
6. Quotation from the essay “model of a neutralised currency and exchange
system for central banks - part 1 - introduction”:
“…Coming from the whole going to the particular needs division. Division is
not practicable for normal use. Having a non changing value does not allow
free pricing, because prices must be able to change. So ANNA cannot be
used like normal money!…”
Acknowledgment
Many thanks for proofreading to Annalena
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