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

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  • Nelson, Edward

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2666.

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Date of creation: Jan 2001
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Handle: RePEc:cpr:ceprdp:2666

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Keywords: Monetary Base; Monetary Policy Rules; Monetary Transmission Mechanism; Money and Interest Rates;

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