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The Transmission Mechanism of Monetary Policy: A Critical Review

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Author Info
Greg Hannsgen (The Levy Economics Institute)

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Abstract

Recently, many economists have credited the late-1990s economic boom in the United States for the easy money policies of the Federal Reserve. On the other hand, observers have noted that very low interest rates have had very little positive effect on the chronically weak Japanese economy. Therefore, some theory of how money affects the economy when it is endogenous would be useful. This paper pursues several such explanations, including the effects of interest rate changes on (1) investment; (2) consumer spending; (3) the exchange rate; and (4) financial markets. The theories of such authors as Kalecki, Keynes, Minsky, and J. K. Galbraith are discussed and evaluated, with an emphasis on the role of cash flow. Some of these theories turn out to be stronger than others when subjected to tests of logic and empirical evidence.

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Paper provided by EconWPA in its series Macroeconomics with number 0411004.

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Length: 28 pages
Date of creation: 03 Nov 2004
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Handle: RePEc:wpa:wuwpma:0411004

Note: Type of Document - pdf; pages: 28
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Related research
Keywords: Monetary Transmission Mechanism Investment Keynes

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E - Macroeconomics and Monetary Economics

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References listed on IDEAS
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    Other versions:
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    Other versions:
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  5. Davidson, Paul, 1991. "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 129-43, Winter. [Downloadable!] (restricted)
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  8. Benoit Mojon & Gert Peersman, 2001. "A VAR description of the effects of monetary policy in the individual countries of the Euro area," Working Paper Series 092, European Central Bank. [Downloadable!]
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  18. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-2), pages 1-78. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. L. Randall Wray, 2004. "The Fed and the New Monetary Consensus: The Case for Rate Hikes, Part Two," Economics Public Policy Brief Archive ppb80, Levy Economics Institute, The. [Downloadable!]
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