ABSTRACT
In this chapter we build on Hayek and Lachmann to further develop Austrian ideas about knowledge and institutions. We apply the theory of Big Players (Butos and Koppl 1993, 1999; Koppl and Yeager 1996) to the problem of the stability of money demand. We find that discretionary monetary policy produces instability of money demand. The difficulty of predicting a discretionary monetary policy reduces money holders’ knowledge of the future. This ignorance of the future induces a kind of herding (explained on p. 99), which creates instability of money demand. The institutions governing money supply influence the stability of money demand by way of their influence on the knowledge and expectations of economic actors.
