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The Barnett Critique After Three Decades: A New Keynesian Analysis

  • Michael T. Belongia
  • Peter N. Ireland

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 shocks. Finally, the analysis characterizes the optimal monetary policy response to disturbances that originate in the financial sector.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17885.

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Date of creation: Mar 2012
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Publication status: published as “The Barnett Critique After Three Decades: A New Keynesian Analysis” (co-authored with Michael T. Belongia), Journal of Econometrics, forthcoming.
Handle: RePEc:nbr:nberwo:17885
Note: ME
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