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A Note on Money and the Conduct of Monetary Policy

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Abstract

Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum's (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We ?nd that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external ?nance premium, which is in?ationary. We consider a number of alternative monetary policy rules, and ?nd that a rule which exploits the joint information from money and the external finance premium performs best.

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  • Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2013. "A Note on Money and the Conduct of Monetary Policy," CEIS Research Paper 279, Tor Vergata University, CEIS, revised 13 May 2013.
    • Handle: RePEc:rtv:ceisrp:279
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    1. Jagjit S. Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The ties that bind: monetary policy and government debt management," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(3), pages 548-581, AUTUMN.
    2. Jagjit S. Chadha, 2014. "Financial frictions and macroeconomic models: a tour d'horizon," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 80-98, April.
    3. Corrado, Luisa & Schuler, Tobias, 2017. "Interbank market failure and macro-prudential policies," Journal of Financial Stability, Elsevier, vol. 33(C), pages 133-149.
    4. Atanas Christev & Yue Kang, 2015. "Money and Inflation: Is Monetary Policy Useful?," Manchester School, University of Manchester, vol. 83, pages 30-50, September.
    5. Jagjit S. Chadha & Germana Corrado & Luisa Corrado, 2018. "Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination?," CEIS Research Paper 433, Tor Vergata University, CEIS, revised 03 May 2018.
    6. Benchimol, Jonathan & Fourçans, André, 2017. "Money And Monetary Policy In The Eurozone: An Empirical Analysis During Crises," Macroeconomic Dynamics, Cambridge University Press, vol. 21(3), pages 677-707, April.
    7. Jagjit Chadha & Young-Kwan Kang, 2016. "Finance and Credit in a Model of Monetary Policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 471, National Institute of Economic and Social Research.
    8. Jagjit S. Chadha & Germana Corrado & Luisa Corrado, 2013. "Stabilisation Policy in a Model of Consumption, Housing Collateral and Bank Lending," Studies in Economics 1316, School of Economics, University of Kent.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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