Putting 'M' Back in Monetary Policy

Abstract

Abstract. Money demand and the stock of money have all but disappeared from monetary policy analyses. Remarkably, it is more common for empirical work on monetary policy to include commodity prices than to include money. This paper establishes and explores the empirical fact that whether money enters a model and how it enters matters for inferences about policy impacts. The way money is modeled significantly changes the size of output and inflation effects and the degree of inertia that inflation exhibits following a policy shock. We offer a simple and conventional economic interpretation of these empirical facts.

Global Monetary Policy Shocks in the G5: A Svar Approach

“…However, this approach might help in solving the problem of 4 In the structural form of the generic model of lag-length k there are kn²+n² free parameters belonging to K and K i , while from the estimates of Γ i and Σ one gets only kn²+n(n+1)/2 values. 5 This specification scheme is the most used in the monetary policy analysis: see among others Gordon and Leeper (1994), Sims and Zha (1998), Leeper and Roush (2003) for the US and Kim and Roubini (2000), Mojon and Peersman (2003), Dedola and Lippi (2005) for other countries.…”

The future of monetary aggregates in monetary policy analysis

“…This observation of Karl Brunner (1969, p. 26) has been restated constantly in recent criticism of monetary aggregates. Typically, the criticism has taken the form of noting that current models, like 16 Batini and Nelson (2001) and Leeper and Roush (2002) document the resilience to sample period of the correlation between inflation and prior M2 growth. Batini (2002) reports similar results using euro area data.…”

Correcting Inflation with Financial Dynamic Fundamentals: Which Adjustments Matter in Africa?

“…Despite a theoretical consensus on money neutrality that has been well documented in empirical literature (Lucas, 1980;Gerlach & Svensson, 2003), the role of money as an informational variable for money policy decision has remained opened to debate (Roffia & Zaghini, 2008;Nogueira, 2009;Bhaduri & Durai, 2012). Indeed empirical works provide mixed results and findings depend on selected countries and historical periods under consideration (Stock & Watson, 1999;Dwyer & Hafer, 1999;Trecroci & Vega-Croissier, 2000;Leeper & Roush, 2002). On a specific note, many studies have concluded that, significant money stock expansions that are not coupled with sustained credit increases are less likely to have inflationary consequences (Bordo & Jeanne, 2002;Borio & Lowe, 2002;Borio and Lowe, 2004;Detken & Smets, 2004; Van den Noord, 2006;Roffia & Zaghini, 2008;Bhaduri & Durai, 2012).…”