Rethinking the Implications of Monetary Policy: How a Transactions Role for Money Transforms the Predictions of Our Leading Models

March 2009
Business Review (Federal Reserve Bank of Philadelphia);2009 First Quarter, p19
Trade Publication
The author calls for the inclusion of liquidity role of money in the New Keynesian model to determine the impact of interest rates to business activity. She defines liquidity effect as inverse relationship between short-term interest rates and the growth rate of aggregate money supply. She adds that link between money, interest rates, inflation and output predicts that interest rate increases when the money supply is expanded. She believes that the model fails to reproduce the liquidity effect because it has no emphasis on open market operations.


Related Articles

  • The Demand for Money in 1971: Was There a Shift? Hamburger, Michael J. // Journal of Money, Credit & Banking (Ohio State University Press);May73, Vol. 5 Issue 2, p720 

    This article comments upon the belief that there existed a shift in the demand for money in 1971. The author points out that during the period in question, the information available did indicate that demand for money decreased in the U.S. However, later information brought such assumptions into...

  • The Keynesian Money Demand-- Another Look At the Evidence. Konstas, Panos; Khouja, Mohamad W. // Journal of Money, Credit & Banking (Ohio State University Press);Nov75, Vol. 7 Issue 4, p521 

    The article comments on a report about the formulation of the demand for money function by M. L. Kliman and E. H. Oksanen, "The Keynesian Demand-for-Money Function, A Comment," which attempts to identify the properties of a demand for money relationship associated with Keynesian economics,...

  • SLUGGISH RESPONSES OF PRICES AND INFLATION TO MONETARY SHOCKS IN AN INVENTORY MODEL OF MONEY DEMAND. Alvarez, Fernando; Atkeson, Andrew; Edmond, Chris // Quarterly Journal of Economics;Aug2009, Vol. 124 Issue 3, p911 

    We examine the responses of prices and inflation to monetary shocks in an inventory-theoretic model of money demand. We show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households' money inventories leads to a partially offsetting...

  • THE CURRENT SIGNIFICANCE OF LIQUIDITY PREFERENCE. Wallich, H. C. // Quarterly Journal of Economics;Aug46, Vol. 60 Issue 4, p490 

    The article introduces the topic on the significance of liquidity preference doctrine which has been subject to criticism as being inadequate to explain the long-term rate of interest. The war has resulted in the increase in money supply and in the increase of idle balances, as one of the major...

  • Changes in the Money Supply Process and Its Impact on Monetary Policy Transmission in the Indian Economy. Palakkeel, Prashobhan // ICFAI Journal of Applied Finance;Mar2009, Vol. 15 Issue 3, p5 

    The monetary scenario in the Indian economy has changed significantly in the post-reform period. The stability of the relationship between alternative monetary measures has been questioned in several studies. The changes in the structure of the money supply process have crucial implications to...

  • MONEY AND INTEREST RATES: AN APPLICATION TO LATIN AMERICA. Jae-Kwang Hwang // Journal of International Finance & Economics;2009, Vol. 9 Issue 3, p123 

    This paper has examined two possible effects of money growth on interest rate in four Latin America over the period of 1980s to 2004. Based on correlation coefficients estimation, the results support the anticipated inflation effect view. However, impulse response function presents mixed...

  • Policy Interaction, Expectations, and the Liquidity Trap. Evans, George W.; Honkapohja, Seppo // Working Paper Series (Federal Reserve Bank of Atlanta);Oct2003, Vol. 2003 Issue 16, p1 

    The authors consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents forecast using adaptive learning. Because of the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second,...

  • DISCOUNT RATE CHANGES AND ANNOUNCEMENT EFFECTS. Lombra, Raymond E.; Torto, Raymond G. // Quarterly Journal of Economics;Feb77, Vol. 91 Issue 1, p171 

    This article discusses the role of the discount rate as a signal of the future course of monetary policy in the U.S. If discount rate changes altered expectations about economic conditions, this should affect expectations about future net cash flows accruing to business enterprises. If changes...

  • Has the Growth of Money Substitutes Hindered Monetary Policy? Cagan, Phillip; Schwartz, Anna J. // Journal of Money, Credit & Banking (Ohio State University Press);May75, Vol. 7 Issue 2, p137 

    The article examines the effects of the growth of money substitutes on monetary policy, in which the short-run and long-run response of money demand to interest rates is noted and separated. The effects of monetary policy on long-term interest rates is studied, but more emphasis is put on...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics