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The Quantity of Money and Monetary Policy

  • Laidler, David

The relationships among the quantity theory of money, monetarism and policy regimes based on money-growth and inflation targeting are briefly discussed as a prelude to an exposition of alternative views of money’s role in the transmission mechanism of monetary policy. The passive-money view treats the money supply as an endogenous variable that plays no role in that mechanism. In contrast the active-money view, while recognizing money’s endogeneity, nevertheless treats it as having causative significance for the behaviour of output and inflation. It is argued that the active view is more plausible, on both theoretical and empirical grounds. It is further suggested that, notwithstanding the effects of institutional change in the Canadian financial system on the stability of relationships involving the quantity of money, the active view implies the desirability of the Bank of Canada’s paying more systematic attention than it now does to the behaviour of monetary aggregates, particularly narrow ones, in the design and implementation of monetary policy.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 99-5.

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Length: 40 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:bca:bocawp:99-5
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  1. Hendry, Scott & Zhang, Guang-Jia, 2001. "Liquidity Effects and Market Frictions," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 153-176, April.
  2. Duguay, Pierre & Longworth, David, 1998. "Macroeconomic models and policy making at the bank of canada," Economic Modelling, Elsevier, vol. 15(3), pages 357-375, July.
  3. Carr, Jack & Darby, Michael R., 1981. "The role of money supply shocks in the short-run demand for money," Journal of Monetary Economics, Elsevier, vol. 8(2), pages 183-199.
  4. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
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  10. Ben S.C. Fung & Marcel Kasumovich, 1997. "Monetary Shocks in the G-6 Countries: Is There a Puzzle?," Staff Working Papers 97-7, Bank of Canada.
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  12. Charles Freedman, 1981. "Monetary Aggregates as Targets: Some Theoretical Aspects," NBER Working Papers 0775, National Bureau of Economic Research, Inc.
  13. P.D. Jonson & E.R. Moses & C.R. Wymer, 1976. "A Minimal Model of the Australian Economy," RBA Research Discussion Papers rdp7601, Reserve Bank of Australia.
  14. Fung, Ben Siu-cheong & Kasumovich, Marcel, 1998. "Monetary shocks in the G-6 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 575-592, October.
  15. James Davidson & Jonathan Ireland, 1990. "Buffer stocks, credit, and aggregation effects in the demand for broad money: theory and an application to the U.K. personal sector," Proceedings, Federal Reserve Bank of Cleveland, pages 349-385.
  16. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
  17. Joseph Atta-Mensah, 1996. "The Empirical Performance of Alternative Monetary and Liquidity Aggregates," Macroeconomics 9601001, EconWPA.
  18. Engert, Walter & Selody, Jack, 1998. "Uncertainty and Multiple Paradigms of the Transmission Mechanism," Staff Working Papers 98-7, Bank of Canada.
  19. Lyle E. Gramley & Samuel B. Chase, 1965. "Time deposits in monetary analysis," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 1380-1406.
  20. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
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