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Dynamic IS curves with and without money: An international comparison

  • Hafer, R.W.
  • Jones, Garett

When money is added to a dynamic IS model, evidence from six countries indicates that money growth usually helps predict the GDP gap and that the predictive power of a short-term real interest is much weaker than previous work suggests. Thus, for dynamic IS models such as that used by Rudebusch, G.D., Svensson, L.E.O. [1999. Policy rules and inflation targeting. In: Taylor, J.B. (Ed.), Monetary Policy Rules. University of Chicago Press, Chicago, pp. 203-246; 2002. Eurosystem monetary targeting: lessons from US data. European Economic Review 46, 417-442], the omission of money appears to come at a high cost.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 4 (June)
Pages: 609-616

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:4:p:609-616
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  1. Rudebusch, Glenn & Svensson, Lars, 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Seminar Papers 672, Stockholm University, Institute for International Economic Studies.
  2. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  3. Daniel M. Laskar, 1983. "Short-Run Independence of Monetary Policy under a Pegged Exchange-Rates System: An Econometric Approach," NBER Chapters, in: The International Transmission of Inflation, pages 314-348 National Bureau of Economic Research, Inc.
  4. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," International Finance Discussion Papers 761, Board of Governors of the Federal Reserve System (U.S.).
  5. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
  6. Edward Nelson, 2003. "Money and the transmission mechanism in the optimizing IS-LM specification," Working Papers 2003-019, Federal Reserve Bank of St. Louis.
  7. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May.
  8. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
  9. Goodhart, Charles A. E. & Hofmann, Boris, 2003. "The IS curve and the transmission of monetary policy: Is there a puzzle?," ZEI Working Papers B 13-2003, ZEI - Center for European Integration Studies, University of Bonn.
  10. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  11. Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
  12. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  13. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
  14. Brückner, Matthias & Schabert, Andreas, 2002. "Does broad money matter for interest rate policy?," ZEI Working Papers B 15-2002, ZEI - Center for European Integration Studies, University of Bonn.
  15. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  16. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
  17. Michael R. Darby, 1983. "Sterilization and Monetary Control: Concepts, Issues, and a Reduced-Form Test," NBER Chapters, in: The International Transmission of Inflation, pages 291-313 National Bureau of Economic Research, Inc.
  18. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
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