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Monetary Policy without Money: Hamlet without the Ghost

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Abstract

Today's standard model of monetary policy has aggregate demand responding directly to an interest rate under the central bank's control, and ignores the role played by the quantity of money in the transmission mechanism. Even though monetary policy is usually aimed at controlling price level behaviour, and the price level is appropriately modelled as being determined by the interaction of the supply and demand for money, it is going too far to characterise this standard model as "Hamlet without the prince". Canadian experience shows that the current framework has worked too well, and its predecessor, based on money growth targeting, worked too badly for this to be fair. Nevertheless, inflation is a monetary phenomenon, and monetary aggregates continue to have useful leading indicator properties. These facts, among others, suggest that a theory of monetary policy which pays explicit attention to the money supply permits a coherent understanding of monetary policy issues. The neglect of money by current approaches leads to a fragmented analysis of monetary policy, just as the omission of the Ghost's demand for vengeance from a production of Hamlet would undermine the play's coherence.

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Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20037.

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Date of creation: Jun 2003
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Handle: RePEc:uwo:uwowop:20037

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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  1. Pierre L. Siklos & Andrew G. Barton, 2001. "Monetary aggregates as indicators of economic activity in Canada: empirical evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 1-17, February.
  2. Edward Nelson, 2003. "Money and the transmission mechanism in the optimizing IS-LM specification," Working Papers 2003-019, Federal Reserve Bank of St. Louis.
  3. Laidler, D., 1988. "Taking Money Seriously," UWO Department of Economics Working Papers 8804, University of Western Ontario, Department of Economics.
  4. Niamh Sheridan & Laurence M. Ball, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund.
  5. Laidler, David E W & Parkin, J Michael, 1975. "Inflation: A Survey," Economic Journal, Royal Economic Society, vol. 85(340), pages 741-809, December.
  6. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers 99-5, Bank of Canada.
  7. Svensson, Lars E O, 1999. "Monetary Policy Issues for the Eurosystem," CEPR Discussion Papers 2197, C.E.P.R. Discussion Papers.
  8. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  9. Freedman, C, 1983. "Financial Innovation in Canada: Causes and Consequences," American Economic Review, American Economic Association, vol. 73(2), pages 101-06, May.
  10. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  11. Mitsuhiro Fukao, 2006. "Financial Strains and the Zero Lower Bound: The Japanese Experience," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 203-232 National Bureau of Economic Research, Inc.
  12. Charles Freedman, 1981. "Monetary Aggregates as Targets: Some Theoretical Aspects," NBER Working Papers 0775, National Bureau of Economic Research, Inc.
  13. Neumann, Manfred J. M. & von Hagen, Jürgen, 2002. "Does inflation targeting matter?," ZEI Working Papers B 01-2002, ZEI - Center for European Integration Studies, University of Bonn.
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Cited by:
  1. Michael Bordo & Anna J. Schwartz, 2006. "David Laidler on Monetarism," NBER Working Papers 12593, National Bureau of Economic Research, Inc.
  2. Daniel L. Thornton, 2012. "Monetary policy: why money matters, and interest rates don’t," Working Papers 2012-020, Federal Reserve Bank of St. Louis.

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