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Has monetary policy become less effective?

  • Joseph H. Haslag

High-powered money has been declining relative to nominal GDP in the United States. Does the ability of monetary policy to affect aggregate activity decline as the money-income ratio falls? In this paper, I specify simple model economy, examining the effects that monetary policy actions and financial innovation would have on the equilibrium money-income ratio. The downward trend in the money-income ratio can be accounted for by increasing inflation, falling reserve requirements, or steady financial development. Whereas higher inflation and falling reserve requirements would reduce the potency of monetary policy, monetary policy's effects are invariant to financial innovation.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/1999/wp9906.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 9906.

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Date of creation: 1999
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Handle: RePEc:fip:feddwp:99-06
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  1. Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-71, December.
  2. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
  3. Brunner, Karl & Meltzer, Allan H, 1972. "Money, Debt, and Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 951-77, Sept.-Oct.
  4. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  5. Peter N. Ireland, 1992. "Endogenous financial innovation and the demand for money," Working Paper 92-03, Federal Reserve Bank of Richmond.
  6. Joseph H. Haslag & Eric R. Young, 1998. "Revenue-maximizing monetary policy," Working Papers 9801, Federal Reserve Bank of Dallas.
  7. Gordon, David B. & Leeper, Eric M. & Zha, Tao, 1998. "Trends in velocity and policy expectations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 265-304, December.
  8. Harold L. Cole & Lee E. Ohanian, 1998. "The demand for money and the nonneutrality of money," Staff Report 246, Federal Reserve Bank of Minneapolis.
  9. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
  10. McGrattan, Ellen R., 1998. "Trends in velocity and policy expectations : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 305-316, December.
  11. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
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