The Monetary Transmission Mechanism

Jess Benhabib and Roger Farmer

Review of Economic Dynamics, 2000, vol. 3, issue 3, 523-550

Abstract: Recent literature on structural vector autoregressions has attempted to identify the effects on the economy of an increase in the stock of money. This work has led to a broad concensus. Initially, an increase in money leads to an increase in economic activity. Output and employment go up, the interest rate declines and prices respond weakly, if at all. Over time, these real effects die out and, in the long run, the only effect of higher money is higher prices. Most writers on the topic have attributed the real effects of money, in the short run, to a barrier of some kind that prevents markets from clearing. We show instead that a competitive market-clearing model in which money enters the production function can reproduce the broad features of data. Our argument exploits the existence of multiple equilibria in a rational-expectations model. (Copyright: Elsevier)

Keywords: sunspots; indeterminacy; business fluctuations (search for similar items in EconPapers)
JEL-codes: E00 E4 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (46)

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Related works:
Working Paper: The Monetary Transmission Mechanism (1999)
Working Paper: The Monetary Transmission Mechanism (1998)
Working Paper: The Monetary Transmission Mechanism (1996)
Working Paper: The Monetary Transmission Mechanism (1996)
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DOI: 10.1006/redy.2000.0100

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