The Future of Monetary Aggregates in Monetary Policy Analysis

Edward Nelson

No 3897, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper considers the role of monetary aggregates in modern macroeconomic models of the New Keynesian type. The focus is on possible developments of these models that are suggested by the monetarist literature, and that in addition seem justified empirically. Both the relation between money and inflation, and between money and aggregate demand, are considered. Regarding the first relation, it is argued that both the mean and the dynamics of inflation in present-day models are governed by money growth. This relationship arises from a conventional aggregate-demand channel; an emphasis on the link between monetary aggregates and inflation in no way requires a direct channel connecting money and inflation. The relevance of money for aggregate demand, in turn, lies not via real balance effects (or any other justification for money in the structure of the IS equation), but on money?s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand. This role for monetary aggregates, which is supported by empirical evidence, enhances the value of money to monetary policy.

Keywords: Money; inflation; Monetary aggregates; Taylor rules; Transmission mechanism (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2003-05
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (215)

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