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

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  • Edward Nelson

Abstract

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, it is shown 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 optimising IS-LM model cannot account for this result, but it is shown 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.

Suggested Citation

  • Edward Nelson, 2000. "Direct effects of base money on aggregate demand: theory and evidence," Bank of England working papers 122, Bank of England.
    • Handle: RePEc:boe:boeewp:122
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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