Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-26T08:03:53.770Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON MONEY AND THE CONDUCT OF MONETARY POLICY

Published online by Cambridge University Press:  30 July 2013

Jagjit S. Chadha ,
Luisa Corrado  and
Sean Holly
Jagjit S. Chadha
Affiliation:
University of Kent
Luisa Corrado*
Affiliation:
University of Rome, Tor Vergata and University of Cambridge
Sean Holly
Affiliation:
University of Cambridge
*
Address correspondence to: Luisa Corrado, Department of Economics, Law and Institutions, University of Rome Tor Vergata, Rome, Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

MoneyDynamic Stochastic General EquilibriumPolicy RulesExternal Finance Premium
Type
Note
Information
Macroeconomic Dynamics , Volume 18 , Issue 8 , December 2014 , pp. 1854 - 1883
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Andrés, J., López-Salido, J.D., and Vallés, J. (2006) Money in an estimated business cycle model of the Euro area. Economic Journal 116, 457–477.CrossRefGoogle Scholar
Aurouba, S.B. and Schorfheide, F. (2011) Sticky prices versus monetary frictions: An estimation of policy trade-offs. American Economic Journal: Macroeconomics 3, 60–90.Google Scholar
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), 668–687.CrossRefGoogle Scholar
Bernanke, B. and Blinder, A. (1988) Credit, money and aggregate demand. American Economic Review 78 (2), 435–439.Google Scholar
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. 1341–1393. Amsterdam: Elsevier.CrossRefGoogle Scholar
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. 1231–1303. Amsterdam: Elsevier.Google Scholar
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.)CrossRefGoogle Scholar
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), 1732–1747.CrossRefGoogle Scholar
Chadha, J.S. and Nolan, C. (2007) Optimal simple rules for the conduct of monetary and fiscal policy. Journal of Macroeconomics 29, 665–689.CrossRefGoogle Scholar
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), 1354–1386.CrossRefGoogle Scholar
Chiu, J. and Meh, C.A. (2011) Financial intermediation, liquidity and inflation. Macroeconomic Dynamics 15, 83–118.CrossRefGoogle Scholar
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. 65–148. Amsterdam: Elsevier.CrossRefGoogle Scholar
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.CrossRefGoogle Scholar
Curdia, V. and Woodford, M. (2010) Credit spreads and monetary policy. Journal of Money, Credit and Banking 42 (1), 3–35.CrossRefGoogle Scholar
Favara, G. and Giordani, P. (2009) Reconsidering the role of money for output, prices and interest rates. Journal of Monetary Economics 56 (3), 419–430.CrossRefGoogle Scholar
Galí, J. (2008) Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton, NJ: Princeton University Press.Google Scholar
Gilchrist, S. (2008) Comment on banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54 (5), 1508–1514.CrossRefGoogle Scholar
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. 45–102. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Goodfriend, M. and McCallum, B.T. (2007) Banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54, 1480–1507.CrossRefGoogle Scholar
Goodhart, C.A.E. (2007) Whatever became of the monetary aggregates? National Institute Economic Review 200, 56–61.CrossRefGoogle Scholar
Ireland, P.N. (2000) Interest rates, inflation, and Federal Reserve policy since 1980. Journal of Money, Credit, and Banking 32, 417–434.CrossRefGoogle Scholar
Ireland, P. (2004) Money's role in the monetary business cycle. Journal of Money, Credit and Banking 36, 969–983.CrossRefGoogle Scholar
King, M. (2002) No money, no inflation—The role of money in the economy. Bank of England Quarterly Bulletin 42, 162–177.Google Scholar
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), 1015–1026.Google Scholar
Kiyotaki, N. and Moore, J.H. (2001) Evil Is the Root of All Money. Clarendon Lecture in Economics 1.Google Scholar
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.CrossRefGoogle Scholar
Nelson, E. (2002) Direct effects of base money on aggregate demand: Theory and evidence. Journal of Monetary Economics 49 (4), 687–708.CrossRefGoogle Scholar
Poole, W. (1970) Optimal choice of monetary policy instruments in a simple stochastic model. Quarterly Journal of Economics 84 (2), 197–216.CrossRefGoogle Scholar
Reynard, S. (2007) Maintaining low inflation: Money, interest rates, and policy stance. Journal of Monetary Economics 54 (5), 1441–1471.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586–606.CrossRefGoogle Scholar
Stracca, L. (2013) Inside money in general equilibrium: Does it matter for monetary policy? Macroeconomic Dynamics 17, 563–590.CrossRefGoogle Scholar
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar
Woodford, M. (2007) Does a “Two-Pillar Phillips Curve” Justify a Two-Pillar Monetary Strategy? Paper presented at the Fourth ECB Central Banking Conference.Google Scholar