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The Barnett Critique After Three Decades: A New Keynesian Analysis

  • Michael T. Belongia

    (University of Mississippi)

  • Peter N. Ireland

    ()

    (Boston College)

This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of real and nominal shocks. Finally, the analysis characterizes the optimal monetary policy response to shocks that originate in an explicitly-modeled financial sector.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 736.

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Date of creation: 01 May 2010
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Handle: RePEc:boc:bocoec:736
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