Monetary Views: Part II
Abstract
Now it is time to explore the left side of the equation of exchange to see what insights can be derived as we consider different assumptions regarding the control of the quantity of money, the behavior of the monetary aggregates, and velocity of money. As already mentioned, an assumption explicitly made in the textbook representation of the monetarist views is that the Fed controls the quantity of money, say M2 or Money of Zero Maturity (MZM). In doing so, the monetarists use one of the three degrees of freedom afforded by the equation of exchange. A second assumption or degree of freedom used by the monetarists is that demand for money is “stable.” In the old days, when we were in grad school, the narrowest ...
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