03 August 2010

What really is money supply?

It is impossible to buy a good or a service except with currency or a check (which is merely a representation of a demand deposit). Yet M1, which is the sum of currency and demand deposits, does not correlate well with real economic activity. The following paper resolves this apparent contradiction. By using Murray Rothbard's arguments but along different lines it shows that not all demand deposits bear the same character, and that the definition of money supply is therefore erroneous. When the error is removed the resulting monetary aggregate (which is different from the Austrian "true money supply") is seen to closely correlate to changes in the economy and that too without a significant time lag.

Read the whole paper below:
What really is money supply?

Category: Economics


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