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Money and interest rates

Author

Listed:
  • Cyril Monnet
  • Warren E. Weber

Abstract

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.

Suggested Citation

  • Cyril Monnet & Warren E. Weber, 2001. "Money and interest rates," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  • Handle: RePEc:fip:fedmqr:y:2001:i:fall:p:2-13:n:v.25no.4
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Mihov, Ilian, 1998. "The liquidity effect and long-run neutrality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 149-194, December.
    2. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
    3. 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.
    4. George T. McCandless & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
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    Citations

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    Cited by:

    1. Gutierrez, Pedro J., 2006. "Short-run and long-run effects of monetary policy in a general equilibrium model with bank reserves," Economic Modelling, Elsevier, vol. 23(4), pages 597-621, July.
    2. Andreas Schabert, "undated". "On the Equivalence of Money Growth and Interest Rate Policy," Working Papers 2003_6, Business School - Economics, University of Glasgow, revised Apr 2003.
    3. Wai Ching Poon, 2010. "Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5?," Monash Economics Working Papers 25-10, Monash University, Department of Economics.
    4. von Thadden, Leopold, 2012. "Monetary policy rules in an OLG model with non-superneutral money," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 147-166.
    5. Seok-Kyun Hur, 2005. "Money Growth and Interest Rates," NBER Working Papers 11102, National Bureau of Economic Research, Inc.
    6. Schabert, Andreas, 2009. "Money supply, macroeconomic stability, and the implementation of interest rate targets," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 333-344, June.
    7. Schabert, Andreas, 2005. "Money supply and the implementation of interest rate targets," Working Paper Series 483, European Central Bank.
    8. Ravenna, Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Research Discussion Papers 18/2007, Bank of Finland.

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    Keywords

    Money ; Interest rates ; Monetary policy;

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