Money and interest rates
This study describes and reconciles two common, seemingly contradictory views about a key monetary policy relationship: that between money and interest rates. Data since 1960 for about 40 countries support the Fisher equation view, that these variables are positively related. But studies taking expectations into account support the liquidity effect view, that they are negatively related. A simple model incorporates both views and demonstrates that which view applies at any time depends on when the change in money occurs and how long the public expects it to last. A surprise money change that is not expected to change future money growth moves interest rates in the opposite direction; one that is expected to change future money growth moves interest rates in the same direction. The study also demonstrates that stating monetary policy as a rule for interest rates rather than money does not change the relationship between these variables.
Volume (Year): (2001)
Issue (Month): Fall ()
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References listed on IDEAS
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- Bernanke, Ben S. & Mihov, Ilian, 1998.
"The liquidity effect and long-run neutrality,"
Carnegie-Rochester Conference Series on Public Policy,
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- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- George T. McCandless & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11. Full references (including those not matched with items on IDEAS)