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The Monetary Transmission Mechanism

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  • Jess Benhabib

    (New York University)

  • Roger E.A. Farmer

    (European University Institute, UCLA and CEPR)

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)

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File URL: http://dx.doi.org/10.1006/redy.2000.0100
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 3 (2000)
Issue (Month): 3 (July)
Pages: 523-550

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Handle: RePEc:red:issued:v:3:y:2000:i:3:p:523-550

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Keywords: sunspots; indeterminacy; business fluctuations;

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References

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  1. Roger E.A. Farmer, 1990. "Sticky Prices," UCLA Economics Working Papers, UCLA Department of Economics 588, UCLA Department of Economics.
  2. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  3. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report, Federal Reserve Bank of Minneapolis 150, Federal Reserve Bank of Minneapolis.
  4. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 24, Federal Reserve Bank of Minneapolis.
  5. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  6. Roger E.A. Farmer, 1994. "The Econometrics of Indeterminacy: An Applied Study," UCLA Economics Working Papers, UCLA Department of Economics 720, UCLA Department of Economics.
  7. Roger E.A. Farmer, 1989. "The Lucas Critique Policy Invariance and Multiple Equilibria," UCLA Economics Working Papers, UCLA Department of Economics 551, UCLA Department of Economics.
  8. Matsuyama, Kiminori, 1991. "Endogenous Price Fluctuations in an Optimizing Model of a Monetary Economy," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1617-31, November.
  9. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
  10. Maurice Obstfeld & Kenneth Rogoff, 1981. "Speculative hyperinflations in a maximizing models: can we rule them out?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 195, Board of Governors of the Federal Reserve System (U.S.).
  11. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1241-1289.
  12. Farmer, Roger E. A., 1988. "What is a liquidity crisis?," Journal of Economic Theory, Elsevier, Elsevier, vol. 46(1), pages 1-15, October.
  13. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(4), pages 27-48, Fall.
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  16. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, Springer, vol. 4(3), pages 345-80.
  17. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers, C.V. Starr Center for Applied Economics, New York University 91-59, C.V. Starr Center for Applied Economics, New York University.
  18. Ascari, G., 1997. "Optimizing Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 486, University of Warwick, Department of Economics.
  19. Farmer, Roger E.A. & Woodford, Michael, 1997. "Self-Fulfilling Prophecies And The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 1(04), pages 740-769, December.
  20. Farmer, Roger E.A., 2000. "Two New Keynesian Theories Of Sticky Prices," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 4(01), pages 74-107, March.
  21. Jeanne, Olivier, 1998. "Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?," European Economic Review, Elsevier, Elsevier, vol. 42(6), pages 1009-1032, June.
  22. Benhabiv, J. & Farmer, R.A.E., 1991. "The Aggregate Effects of Monetary Externalities," Papers, Cambridge - Risk, Information & Quantity Signals 164, Cambridge - Risk, Information & Quantity Signals.
  23. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
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  25. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report, Federal Reserve Bank of Minneapolis 135, Federal Reserve Bank of Minneapolis.
  26. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 183-203, April.
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  28. repec:cup:macdyn:v:1:y:1997:i:4:p:740-69 is not listed on IDEAS
  29. Benhabib, Jess & Bull, Clive, 1983. "The Optimal Quantity of Money: A Formal Treatment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 101-11, February.
  30. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, Econometric Society, vol. 68(5), pages 1151-1180, September.
  31. Kenneth J. Matheny, 1998. "Non-neutral responses to money supply shocks when consumption and leisure are Pareto substitutes," Economic Theory, Springer, Springer, vol. 11(2), pages 379-402.
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  33. repec:cup:macdyn:v:4:y:2000:i:1:p:74-107 is not listed on IDEAS
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