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Monetary Policy without Money: Hamlet without the Ghost



Today's standard model of monetary policy has aggregate demand responding directly to an interest rate under the central bank's control, and ignores the role played by the quantity of money in the transmission mechanism. Even though monetary policy is usually aimed at controlling price level behaviour, and the price level is appropriately modelled as being determined by the interaction of the supply and demand for money, it is going too far to characterise this standard model as "Hamlet without the prince". Canadian experience shows that the current framework has worked too well, and its predecessor, based on money growth targeting, worked too badly for this to be fair. Nevertheless, inflation is a monetary phenomenon, and monetary aggregates continue to have useful leading indicator properties. These facts, among others, suggest that a theory of monetary policy which pays explicit attention to the money supply permits a coherent understanding of monetary policy issues. The neglect of money by current approaches leads to a fragmented analysis of monetary policy, just as the omission of the Ghost's demand for vengeance from a production of Hamlet would undermine the play's coherence.

Suggested Citation

  • David Laidler, 2003. "Monetary Policy without Money: Hamlet without the Ghost," UWO Department of Economics Working Papers 20037, University of Western Ontario, Department of Economics.
  • Handle: RePEc:uwo:uwowop:20037

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    References listed on IDEAS

    1. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Staff Working Papers 99-5, Bank of Canada.
    2. Mitsuhiro Fukao, 2006. "Financial Strains and the Zero Lower Bound: The Japanese Experience," NBER Chapters,in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 203-232 National Bureau of Economic Research, Inc.
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    6. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters,in: The Inflation-Targeting Debate, pages 249-282 National Bureau of Economic Research, Inc.
    7. Manfred J. M. Neumann & Jurgen Von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 127-148.
    8. Laidler, David E W & Parkin, J Michael, 1975. "Inflation: A Survey," Economic Journal, Royal Economic Society, vol. 85(340), pages 741-809, December.
    9. Freedman, C, 1983. "Financial Innovation in Canada: Causes and Consequences," American Economic Review, American Economic Association, vol. 73(2), pages 101-106, May.
    10. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    11. Pierre L. Siklos & Andrew G. Barton, 2001. "Monetary aggregates as indicators of economic activity in Canada: empirical evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 1-17, February.
    12. David E. Laidler, 1988. "Taking Money Seriously," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 687-713, November.
    13. Charles Freedman, 1981. "Monetary Aggregates as Targets: Some Theoretical Aspects," NBER Working Papers 0775, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Thornton, Daniel L., 2014. "Monetary policy: Why money matters (and interest rates don’t)," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 202-213.
    2. Michael Bordo & Anna J. Schwartz, 2006. "David Laidler on Monetarism," NBER Working Papers 12593, National Bureau of Economic Research, Inc.

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