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Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan

Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan
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Year:    1997

Author:    Werner, Richard A.

Credit and Capital Markets – Kredit und Kapital, Vol. 30 (1997), Iss. 2 : pp. 276–309

Abstract

Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan

Three important "anomalies" that have occurred in the 1980s in several countries, including Scandinavia and Japan, have challenged the traditional monetary model: (1) the observed velocity decline and consequent instability of the money demand function; (2) significant asset price rises, often referred to as "bubbles" and (3) enormous capital outflows from Japan in the 1980s and a sudden reversal in the early 1990s. In this paper, a simple model is proposed that encompasses traditional theory and manages to explain the three main anomalies. It centres on a "quantity theory" framework of credit-money circulation, which is disaggregated into "real" and financial transactions. Excess credit creation in the "financial circulation" is shown to be responsible for asset price booms, the observed velocity decline and, in an open economy extension, foreign investment. Empirical evidence from Japan supports the model. Implications for theory, further research and policy are explored.

Journal Article Details

Publisher Name:    Global Science Press

Language:    Multiple languages

DOI:    https://doi.org/10.3790/ccm.30.2.276

Credit and Capital Markets – Kredit und Kapital, Vol. 30 (1997), Iss. 2 : pp. 276–309

Published online:    1997-02

AMS Subject Headings:    Duncker & Humblot

Copyright:    COPYRIGHT: © Global Science Press

Pages:    34

Author Details

Werner, Richard A.

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  4. Bank of England (1996), Inflation Report, Summer quarter.  Google Scholar
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Section Title Page Action Price
Richard A. Werner: Berichte Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan 276
I. Introduction 276
II. Anomalies of the standard macro monetary model 277
1. The anomaly of the velocity decline 278
2. The anomaly of asset price bubbles 279
3. The anomaly of Japanese foreign investment 280
III. Towards a new paradigm of disaggregated Credit 281
1. 'Money' is credit 281
2. A Dichotomous Equation of Exchange 283
3. Financial asset bubbles 284
4. The velocity 'anomaly' 286
5. Open Economy Extension 286
IV. Explaining the Japanese 'anomalies' empirically 287
1. The Illusion of a Velocity Decline in the 1980s 287
2. The Creation of the Japanese bubble 294
3. Explaining Japanese capital flows 299
V. Conclusion and Implications 302
1. Conclusion 302
2. Policy implications 305
3. Further Research 305
References 306
Summary Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan 308
Zusammenfassung Grundlagen eines neuen monetären Ansatzes: Die Quantitätstheorie des disaggregierten Kredits, empirisch belegt am Beispiel Japans 308
Résumé Vers un nouveau paradigme monétaire: La théorie quantitative du crédit désagrégé à l'exemple empirique du Japon 309