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Direct effects of base money on aggregate demand: theory and evidence

  • Nelson, Edward

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 49 (2002)
Issue (Month): 4 (May)
Pages: 687-708

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Handle: RePEc:eee:moneco:v:49:y:2002:i:4:p:687-708
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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