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The role of money in the transmission mechanism of monetary policy: evidence from Thailand

  • Pojanart Sunirand
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    Meltzer (2001b) argues that the current trend for downgrading the role of money in standard macro models is erroneous as it masks those monetary transmission channels which operate through changes in relative yields of assets. This paper shows that the scope of these changes can be empirically segregated into (i) the changes in relative prices along the term structure (term-structure effect) and (ii) the changes in relative risk premia component of different kinds/classes of assets (risk-premia effect). Using Thailand data, I found that both effects are significant. I argue from this finding that standard macro models which are based on the two-asset assumption are distorting and that the problem can be alleviated by introducing an explicit role of money in these models.

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    File URL: http://eprints.lse.ac.uk/24850/
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24850.

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    Length: 26 pages
    Date of creation: May 2003
    Date of revision:
    Handle: RePEc:ehl:lserod:24850
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    Web page: http://www.lse.ac.uk/

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    1. Peter N. Ireland, 2000. "Money's Role in the Monetary Business Cycle," Boston College Working Papers in Economics 458, Boston College Department of Economics.
    2. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    3. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    5. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers.
    6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    7. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    8. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
    9. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 475-512, May.
    10. Rudebusch, Glenn D & Svensson, Lars E O, 2000. "Eurosystem Monetary Targeting: Lessons from US Data," CEPR Discussion Papers 2522, C.E.P.R. Discussion Papers.
    11. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
    12. Peter N. Ireland, 2001. "The Real Balance Effect," NBER Working Papers 8136, National Bureau of Economic Research, Inc.
    13. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    15. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, October.
    16. Evan F. Koenig, 1989. "Real money balances and the timing of consumption: an empirical investigation," Research Paper 8906, Federal Reserve Bank of Dallas.
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