Direct Effects of Base Money on Aggregate Demand: Theory and Evidence

Edward Nelson

No 2666, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Meltzer (1999a) shows that real monetary base growth is a significant determinant of consumption growth in the United States, controlling for the short-term real interest rate. In this paper, I show that the same property of base money holds for total output (relative to trend or potential) in both the United States and the United Kingdom. The standard optimizing IS-LM model cannot account for this result, but I show that it can once the long-term nominal interest rate is included in the money demand function. Because the long-term real rate matters for aggregate demand, the presence of the long-term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky.

Keywords: Monetary base; Monetary transmission mechanism; Monetary policy rules; Money and interest rates (search for similar items in EconPapers)
JEL-codes: E32 E40 E51 E52 (search for similar items in EconPapers)
Date: 2001-01
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Citations: View citations in EconPapers (3)

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Journal Article: Direct effects of base money on aggregate demand: theory and evidence (2002)
Working Paper: Direct effects of base money on aggregate demand: theory and evidence (2000)
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