Skip to main content Accessibility help
×
×
Home

A NOTE ON MONEY AND THE CONDUCT OF MONETARY POLICY

  • Jagjit S. Chadha (a1), Luisa Corrado (a2) and Sean Holly (a3)
Abstract

Prior to the financial crisis, mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, using a DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best.

Copyright
Corresponding author
Address correspondence to: Luisa Corrado, Department of Economics, Law and Institutions, University of Rome Tor Vergata, Rome, Italy; e-mail: luisa.corrado@uniroma2.it.
References
Hide All
Andrés, J., López-Salido, J.D., and Vallés, J. (2006) Money in an estimated business cycle model of the Euro area. Economic Journal 116, 457477.
Aurouba, S.B. and Schorfheide, F. (2011) Sticky prices versus monetary frictions: An estimation of policy trade-offs. American Economic Journal: Macroeconomics 3, 6090.
Benk, S., Gillman, M., and Kejak, M. (2005) Credit shocks in the financial deregulatory era: Not the usual suspect. Review of Economic Dynamics 8 (3), 668687.
Bernanke, B. and Blinder, A. (1988) Credit, money and aggregate demand. American Economic Review 78 (2), 435439.
Bernanke, B., Gertler, M., and Gilchrist, S. (1999) The financial accelerator in a quantitative business cycle framework. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, 1st ed., vol. 1, pp. 13411393. Amsterdam: Elsevier.
Campbell, J.Y. (1999) Asset prices, consumption, and the business cycle. In Taylor, J.B. and Woodford, M. (eds.), Handbook of Macroeconomics, 1st ed., vol. 1, pp. 12311303. Amsterdam: Elsevier.
Chadha, J.S., Corrado, L., and Meaning, J. (2012) Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies. Studies in Economics 1208, Department of Economics, University of Kent. (Also Bank for International Settlements paper 66.)
Chadha, J.S., Corrado, L., and Sun, Q. (2010) Money, prices and liquidity effects: Separating demand from supply. Journal of Economic Dynamics and Control 34 (9), 17321747.
Chadha, J.S. and Nolan, C. (2007) Optimal simple rules for the conduct of monetary and fiscal policy. Journal of Macroeconomics 29, 665689.
Chari, V.V., Christiano, L.J., and Eichenbaum, M. (1995) Inside money, outside money, and short-term interest rates. Journal of Money, Credit and Banking 27 (4), 13541386.
Chiu, J. and Meh, C.A. (2011) Financial intermediation, liquidity and inflation. Macroeconomic Dynamics 15, 83118.
Christiano, L.J., Eichenbaum, M., and Evans, C.L. (1999) Monetary policy shocks: What have we learned and to what end? In Taylor, J. B. and Woodford, M. (ed.), Handbook of Macroeconomics, 1st ed., vol. 1, pp. 65148. Amsterdam: Elsevier.
Christiano, L.J., Motto, R., and Rostagno, M. (2007) Two Reasons Why Money and Credit May be Useful in Monetary Policy. NBER working paper 13502.
Curdia, V. and Woodford, M. (2010) Credit spreads and monetary policy. Journal of Money, Credit and Banking 42 (1), 335.
Favara, G. and Giordani, P. (2009) Reconsidering the role of money for output, prices and interest rates. Journal of Monetary Economics 56 (3), 419430.
Galí, J. (2008) Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton, NJ: Princeton University Press.
Gilchrist, S. (2008) Comment on banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54 (5), 15081514.
Gilchrist, S. and Saito, M. (2008) Expectations, asset prices, and monetary policy: The role of learning. In Campbell, John Y. (ed.), Asset Prices and Monetary Policy, pp. 45102. Chicago: University of Chicago Press.
Goodfriend, M. and McCallum, B.T. (2007) Banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54, 14801507.
Goodhart, C.A.E. (2007) Whatever became of the monetary aggregates? National Institute Economic Review 200, 5661.
Ireland, P.N. (2000) Interest rates, inflation, and Federal Reserve policy since 1980. Journal of Money, Credit, and Banking 32, 417434.
Ireland, P. (2004) Money's role in the monetary business cycle. Journal of Money, Credit and Banking 36, 969983.
King, M. (2002) No money, no inflation—The role of money in the economy. Bank of England Quarterly Bulletin 42, 162177.
King, R.G. and Watson, M.W. (1998) The solution of singular linear difference systems under rational expectations. In Symposium on Forecasting and Empirical Methods in Macroeconomics and Finance, International Economic Review 39 (4), 10151026.
Kiyotaki, N. and Moore, J.H. (2001) Evil Is the Root of All Money. Clarendon Lecture in Economics 1.
Meier, A. and Müller, G.J. (2005) Fleshing Out the Monetary Transmission Mechanism: Output Composition and the Role of Financial Frictions. ECB working paper 500.
Nelson, E. (2002) Direct effects of base money on aggregate demand: Theory and evidence. Journal of Monetary Economics 49 (4), 687708.
Poole, W. (1970) Optimal choice of monetary policy instruments in a simple stochastic model. Quarterly Journal of Economics 84 (2), 197216.
Reynard, S. (2007) Maintaining low inflation: Money, interest rates, and policy stance. Journal of Monetary Economics 54 (5), 14411471.
Smets, F. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586606.
Stracca, L. (2013) Inside money in general equilibrium: Does it matter for monetary policy? Macroeconomic Dynamics 17, 563590.
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.
Woodford, M. (2007) Does a “Two-Pillar Phillips Curve” Justify a Two-Pillar Monetary Strategy? Paper presented at the Fourth ECB Central Banking Conference.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed