This study reviews empirical evidence from four research methods related to the impact of money on short-term nominalrates. The studies consistently fail to find evidence supporting the much hypothesized short-term, negative relationship between money and nominal rates since at least April 1975. Reasons for the absence of a negative relationship include the tendency of financial markets to anticipate corrective action by the Fed whenever M1 deviates from targeted growth ranges and a rapid adjustment of inflationary expectations to changes in money growth.There is a general perception that the Federal Reserve can significantly lower short-term interest rates, at least for a while, by increasing the growth rate of money. In a review of studies on this issue from four research methods, this paper finds no consistent empirical evidence (since at least April 1975) to support this negative relationship between money and interest rates. The four research methods include two families of interest rate models and two rational expectation-efficient market models. I. ECONOMIC THEORYThe theoretical effect of a monetary acceleration can be examined in the Hicksian IS-LM framework. Assume the Fed permanently accelerates money growth and that prices, output, and inflation are not immediately affected.The acceleration shifts the LM curve, increases real balances, and reduces nominal and real interest rates. This is the liquidity effect.The combination of lower real rates and higher real balances stimulates spending, which leads to an increase in nominal income. This is the income effect; it increases the demand for money and increases nominal rates.Monetary acceleration also has an impact on inflationary expectations. Increased inflationary expectations raise the IS curve, causing an increase in nominal rates.Key to the popular argument that the Fed can lower nominal rates at least for a while through a monetary acceleration are three assumptions: that prices do not adjust immediately to the new money supply, and that inflationary expectations and money demand are not affected quickly by changes in money. It is clear from the literature that these assumptions have been widely *Associate Professor, North Texas State University. The author wishes to thank J. Walter Elliott, Gary J. Santoni, Richard J. Sweeney, and two anonymous referees for valuable comments on earlier drafts. 67 Economic Inquiry Vol. XXV, January 1987, 67-82 1. The market response is not dependent upon a quantitatively measureable short-run, negative relationship between money and rates. It is dependent upon the expectation that such an effect exists. The strength of the response should adjust over time with expectations. 2. K. M. Carlson [1980] and Friedman [1984] present evidence that the lags between money and prices and money and income have shortened. 3. Friedman [1980] recently argued that money affects inflationary expectations within a month or two.

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Two conclusions are reached about how a family should calculate its asset mix. First, if the assets will be used to finance retirement needs, the asset mix should be based on after-tax values, because goods and services are purchased with after-tax dollars. This novel conclusion rejects current practice. The second conclusion concerns which assets and liabilities should be included in the portfolio. If the purpose of the calculation is to consider a family’s retirement needs, the asset mix should include the promises of defined-benefit pension plans and Social Security, and the family’s mortgage should be treated as a short bond position. Also, if the family is willing to downsize or borrow against the residence, part of its value should be included in the portfolio. © 1998 Elsevier Science Inc. All rights reserved.

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