A Critique of Theories of Money Stock Determination

Monetary Regimes, Money Supply, and the Usa Business Cycle Since 1959: Implications for Monetary Policy Today

“…Following Hetzel (1986), we capture four exogenous sources of shocks to the economy: a money demand shock, ξ m d ,t ; a money supply shock, ξ m s ,t ; a technology shock, ξ z,t ; and an interest rate target shock, i t . Notice that we exclude the standard price markup shock in the NK Phillips curve, which implies that firm price markups are constant.…”

“…Borio and Disyatat (2010)). 1 The principal problem with this policy position is the long-standing confusion over the effect of the monetary authority's choice between reserves and interest rate manipulation [Hetzel (1986); Ireland (2014)]. And to understand the effect of monetary policy, we require an endogenous monetary framework consistent with both theory and empirical regularity.…”

“…Specifically, we highlight three characteristics of a monetary economy in favor of a traditional model of money stock determination that is based on the Fisher relation, price-level determination, and the behavior of money demand. Together, these three conditions form the core of the general equilibrium framework envisaged by McCallum (1981McCallum ( , 1986, McCallum and Hoehn (1983) and Hetzel (1986), which we incorporate into an NK dynamic stochastic general equilibrium (DSGE) model. The key contribution here is that for nominal money to play a causal role in determining the price level, at least some of the determinants of nominal money supply must differ from the determinants of real money demand.…”

“…'s (1981; 1986) two-equation, full employment IS-LM model with a money supply rule showed it was possible to peg the nominal interest to some target value with a money rule and obtain price determinacy. Hetzel (1986) extended McCallum (1986) to include a traditional banking sector specification. His model contains four key equations: a Fisher relation, a demand function for real money balances, a monetary rule, and a banking sector relationship between nominal money supply, the short-term market interest rate, and bank reserves.…”

Interest-Rate Smoothing

“…In any event, since any of these rules can be extended to achieve price-level determinism, this criticism does not constitute a serious attack on the logic Goodfriend (1987), 4cCallum (1986, and Hetzel (1987). The private economy is described by two equations, the first pertaining to interest-rate determination, and the second to the real demand for money:…”