The Barnett Critique after Three Decades: A New Keynesian Analysis

54 Pages Posted: 2 Mar 2012

See all articles by Michael T. Belongia

Michael T. Belongia

University of Mississippi - Department of Economics

Peter N. Ireland

Boston College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2012

Abstract

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.

Suggested Citation

Belongia, Michael T. and Ireland, Peter N., The Barnett Critique after Three Decades: A New Keynesian Analysis (March 2012). NBER Working Paper No. w17885. Available at SSRN: https://ssrn.com/abstract=2014579

Michael T. Belongia (Contact Author)

University of Mississippi - Department of Economics ( email )

371 Holman Hall
University, MS 38677
United States

Peter N. Ireland

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3687 (Phone)
617-552-2308 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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