Advanced Search
MyIDEAS: Login to save this paper or follow this series

The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model

Contents:

Author Info

  • Marco Espinosa-Vega
  • Steven Russell

Abstract

In this paper we integrate Diamond's (1965) model of neoclassical production and capital with Wallace's (1984) model of monetary policy in order to study the real effects of two types of monetary policy actions: open market operations and changes in reserve requirements. We show that a permanent easing of open market or reserve policy can produce permanent increases in both the inflation rate and the level (but not the growth rate) of output. We also describe conditions under which the effects of these policies on real interest rates and output can be large relative to their effects on the rate of inflation. When we compare the effects of the two types of policies we find that open market operations are the policy tool that minimizes the change in the inflation rate necessary to achieve a given change in the level of output.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.frbatlanta.org//filelegacydocs/Wp9806.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 98-6.

as in new window
Length:
Date of creation: 1998
Date of revision:
Handle: RePEc:fip:fedawp:98-6

Contact details of provider:
Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309
Phone: 404-521-8500
Email:
Web page: http://www.frbatlanta.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Keynesian economics ; Monetary policy;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  2. Bhattacharya, Joydeep, et al, 1997. "Monetary, Fiscal, and Reserve Requirement Policy in a Simple Monetary Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 321-50, May.
  3. James B. Bullard & Steven Russell, 2004. "How costly is sustained low inflation for the U.S. economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-68.
  4. John H. Boyd & Ross Levine & Bruce D. Smith, 1997. "Inflation and financial market performance," Working Papers 573, Federal Reserve Bank of Minneapolis.
  5. Robert King & Mark W. Watson, 1992. "Testing Long Run Neutrality," NBER Working Papers 4156, National Bureau of Economic Research, Inc.
  6. Azariadis, Costas & Smith, Bruce D, 1996. " Private Information, Money, and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect," Journal of Economic Growth, Springer, vol. 1(3), pages 309-32, September.
  7. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796.
  8. Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
  9. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  10. Shmuel Kandel & Aharon R. Ofer & Oded Sarig, . "Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis," Rodney L. White Center for Financial Research Working Papers 2-95, Wharton School Rodney L. White Center for Financial Research.
  11. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  12. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  13. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
  14. Danthine, Jean-Pierre & Donaldson, John B. & Smith, Lance, 1987. "On the superneutrality of money in a stochastic dynamic macroeconomic model," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 475-499, December.
  15. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  16. Preston J. Miller & Thomas J. Sargent, 1984. "A reply to Darby," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  17. Miller, Preston J. & Todd, Richard M., 1995. "Real effects of monetary policy in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 125-153.
  18. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
  19. Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
  20. Orphanides, Athanasios & Solow, Robert M., 1990. "Money, inflation and growth," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 6, pages 223-261 Elsevier.
  21. Thomas M. Supel & Richard M. Todd, 1984. "Should currency be priced like cars?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  22. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  23. Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
  24. Thomas J. Sargent & Neil Wallace, 1974. "Rational expectations and the theory of economic policy," Working Papers 29, Federal Reserve Bank of Minneapolis.
  25. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  26. Mishkin, Frederic S., 1981. "The real interest rate: An empirical investigation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 151-200, January.
  27. Bullard, James & Russell, Steven, 1999. "An empirically plausible model of low real interest rates and unbacked government debt," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 477-508, December.
  28. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  29. Shaghil Ahmed & John H. Rogers, 1996. "Long-term evidence on the Tobin and Fisher effects: a new approach," International Finance Discussion Papers 566, Board of Governors of the Federal Reserve System (U.S.).
  30. Frederic S. Mishkin, 1982. "The Real Interest Rate: A Multi-Country Empirical Study," NBER Working Papers 1047, National Bureau of Economic Research, Inc.
  31. Romer, David, 1986. "A Simple General Equilibrium Version of the Baumol-Tobin Model," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 663-85, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Sonali Das & Rangan Gupta & Patrick T. Kanda & Monique Reid & Christian K. Tipoy & Mulatu F. Zerihun, 2012. "Real Interest Rate Persistence in South Africa: Evidence and Implications," Working Papers 17/2012, Stellenbosch University, Department of Economics.
  2. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Working Papers 2008-018, Federal Reserve Bank of St. Louis.
  3. Marco Espinosa-Vega & Steven Russell, 2001. "Stability of steady states in a model of pleasant monetarist arithmetic," Working Paper 2001-20, Federal Reserve Bank of Atlanta.
  4. Cothren, Richard, 2006. "A model of optimal legal restrictions and open market operations," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 480-492, September.
  5. Frederick H. Wallace & Gary L. Shelley, 2004. "Long Run Neutrality and Superneutrality of Money: Aggregate and Sectoral Tests for Nicaragua," Macroeconomics 0402004, EconWPA.
  6. Leopold von Thadden, 2004. "Active monetary policy, passive fiscal policy and the value of pure debt: some further monetarist arithmetic," Money Macro and Finance (MMF) Research Group Conference 2003 108, Money Macro and Finance Research Group.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:98-6. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.