Crash of the monetary market theory. Empirical anomalies and theoretical illusions
This article examines the current state of money market theory. Functioning of money markets in developed and developing countries over the past 30 years gave birth to sharp contradictions with main components of this theory. Every year an increasing number of theoretical paradoxes and empirical anomalies arises. The most important are: a steady money velocity decline, mystery of the missing money, breakdown of money demand mod- els, permanent liquidity traps, weakening of interest rate in equilibrating a money market. This study reveals nature of these anomalies. The main reason for the gap between theory and money market functioning is a number of nonviable assumptions: an assumption of money supply’s exogenous nature, an assumption of permanent risk attitude, underestima- tion of banking multiplier and credit nature of conventional money, obsolete methods for measuring money supply and methodological flaws of monetary aggregates’ concept. We introduce an alternative approach to measuring money supply - a concept of credit ag- gregates. The credit approach allows to eliminate data anomalies and to remove theoretical contradictions. Although this raises a question - is classical theory of money market viable in light of credit nature of conventional money