[2]Pigou, A (1917)

[3]Patinkin,D (1987)

[4]The classical system believed that individuals generally held a fixed proportion of their income in money balances for transaction purposes, so that nobody willingly holds idle balances.

[5]Here, we merely assume an increase in money holdings and analyse the effects.Classical writers assumed an increase in the money supply would result from an excess of exportover imports bringing about a net inflow of gold.

[6]Friedman, M (1987)

[7]The natural rate of interest is the rate of interest that equilibrates saving and investment.

[8]While this representation of the debate is an exaggeration textbooks often portray the debate as such to derive the difference between the two schools of thought.

[9]Hoarding is the term Keynes used to explain increased cash holdings by people for speculative purposes.

[10]In Keyness speculative version of liquidity preference wealth-holders are plungers - all or nothing speculators. They either hold all of their portfolio in the form of money or in the form of bonds but they do not hold a combination of bonds and money.

[11]The costs accruing in terms of the opportunity cost of not holding bonds and the benefits in remaining liquid and avoiding potential capital loss (i.e. if the price of bonds fall).

[12]In this situation monetary policy is ineffective in two transmission mechanisms. Its inefficacy in influencing the rate of interest implies that investment is not stimulated by the cost of capital channel i.e. since the rate of interest can not be lowered the cost of capital can not be reduced so investment is not encouraged. Also the direct effect of an increase in the money supply, as emphasised by classical writers, would not occur as people would hold more money instead of increasing expenditure.

[13]The cost of capital effect is the mechanism whereby an increase in the money supply, reduces interest rates, reducing the cost of capital for firms in making investment.

[14]This is not to say that Keynes did not recognise the significance of money in the economy.

[15]In this instance Keynes is restating his belief that investment was interest inelastic and determined by psychological factors such as animal spirits implying a limited role for monetary policy.

[16]One reason doubting the possible existence of the liquidity trap is that expectations regarding what is the normal rate of interest will tend to converge near the actual level if it remains unchanged for some time.

[17]Until the Cambridge Cash Balance version classical writers were generally more concerned with the velocity of money and did not analyse the motives for holding money since money was only seen as a medium of exchange.

[18]While this has traditionally been seen as the distinguishing line between monetarists and Keynesians the distinction is no longer valid when comparing the views of monetarists with those of contemporary Keynesians.

[19]Friedman and Meiselmann (1963)

[20]Monetarist also recognise the Keynesian cost of capital transmission mechanism and recognise that capital goods are not the only substitutes for money.

[21]Friedman , M (1974)

[22]Trevithik (1992)

[23]Friedman , M (1969)

[24]See Friedman and Meiselmann (1963) and Anderson and Jordon (1968)

[25]Monetarists used reduced form models, involving only one equation, which suited their long run theories of the economy. Keynesians preferred structural form models which tried to model all of the relevant interrelationships in the economy.

[26]Blaug (1980)

[27]This is the idea of instrumentalism ,advocated by Friedman, that the test of a good theory is its ability to predict.

[28]Although Friedman might balk, I use the term Debates within Monetarism to denote the fact that all of the debates protagonists are monetarists, in that they believe in concentrating on nominal variables rather than output. Nigel Lawson plausibly argues that what unites these people is greater than what divides them.

[29]This differs from Monetary Base Control since the amount of the reserves which the banks borrow from the Fed depends on the difference between market and discount interest rates. Therefore it amounts to interest rate control.

[30]However, MBC was not applicable in Britain, where, unlike the US, the money multiplier is highly unstable. In the US, the banks reserve-to-deposit ratio is legally prescribed and changes in reserves induced by the Fed have predictable effects upon the money supply. This does not hold in Britain where the banks hold whatever cash reserves they think prudent (usually 1.5% of deposits) and are allowed to meet reserve needs from their liquid assets, which, by agreement with the Bank of England, compromise 12% of their overall portfolios. It would be impossible to operate non-mandatory MBC schemes under such a system and very difficult to reintroduce a legal reserve ratio.

[31]These are interest rate premia which compensate investors for the possibility of devaluation. Some interest differentials may remain arising from investor preferences for strong currency securities. Thus a very small premium may remain on the yield on Irish long gilts compared to German long gilts.

[32]Bean (1992) presents a useful summary, de Grauwe (1992) considers the issue at greater length, while the European Commission (1989) presents an extensive although perhaps partisan analysis. Honohan (1991,1993) considers the Irish case.

[33]It should be noted that for these gains to be fully realised the liberated resources will necessarily have to be re-employed productively elsewhere in the economy. The Commission argues these resources could be re-deployed in financial intermediation in ECU denominated assets, the demand for which is maintained to be likely to rise in the event of the introduction of a single currency. Factors such as wage/price rigidity could mitigate against such a reallocation however, preventing the full realisation of these gains.

[34]Frenkel (1987)

[35]The output effect is generated by the reduction of the real wage caused by the inflation of the price level. This leads to increased labour demand and output.

[36]See Giavazzi and Pagano (1988) for a more formal treatment of the subject in the context of membership of the European Monetary System.

[37]The loss of seignorage revenues is also a cost for some nations perhaps Greece or Portugal but is not nearly as significant. This loss will also be offset by seignorage revenues and profits of the European Central Bank which will be distributed to member nations.

[38]While all of the UK's competitors would have been affected, Ireland was disadvantaged disproprotionately owing to its reliance on UK markets.

[39]The correlation coefficients between lrish and German supply and demand shocks in the period lay between 0 and -0.1.

[40]Extra-EU trade will still be subject to exchange rates and consequently the European Economy to shocks from this source.

[41] Peter Kenen (1969) contends that sufficient product diversity will eliminate the possibility of product-specific shocks and as such constitutes one definition of an optimum currency area.

[42]Commission (1990) p 151

[43]The author wishes to acknowledge with thanks the useful comments provided by Professor Dermot

McAleese in writing this essay.

[44]Credibility may be measured as the variance of the deviation between actual policy and the public's perception of that policy.

[45]Quoted in Frass (1974) p 447-448

[46]However this thesis that the Banks operations were actually efficacious in keeping reserve ratios high has been subjected to challenge in recent times.

[47]The banks future was a key issue in the 1832 presidential election and Jackson convincingly won while standing on a staunch anti-bank platform. Even Hammond, admits this popularity but fails to draw it into his analysis.

[48]This groups anti-BUS stance is recorded by Hammond and their crucial role is referred to by Frass.

[49]William Leggett quoted in White (1986).

[50]Frass (1974) p 465-468.

[51]Fama (1970) p.416

[52]Smith (1971) p. 242

[53]See Fama (1965)

[54]For an extension of this argument see Ali (1977)

[55]See Dimson and Marsh (1984) and Elton, Gruber and Grossman (1986).

[56]For example, if faced with a choice of a 75% chance of winning [[sterling]]10,000 and a 100% chance of winning $7,500, most would choose the $7,500. Similarly, if faced with a choice between a loss of [[sterling]]7,500 or a 75% chance of a loss of [[sterling]]10,000, most would take the chance.

[57]No doubt Boyle (1994) disagrees Isnt it strange how the very people who laugh at gypsies, fortune tellers and horoscopes, are the ones who trust economists, quoted in Publications.