A Critique of Theories of Money Stock Determination

Federal Reserve Bank of Richmond Working Paper No. 86-6

33 Pages Posted: 24 Oct 2012

See all articles by Robert L. Hetzel

Robert L. Hetzel

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: October 1, 1986

Abstract

Many different models of money stock determination exist in the literature. An attempt is made here to understand why the differences in these models arise. Differences in models are ascribed first to the (usually implicit) role assigned to the price level. From this perspective, models fall into two categories. Models in the quantity theory tradition require that the price level adjust in order to cause the real quantity of money to equal the real quantity demanded. In contrast, in the real bills or banking school tradition, the nominal quantity of money adjusts in order to provide the real quantity demanded. Much of the discussion below deals with the way in which the macroeconomics inspired by Keynes' General Theory encouraged models in the latter tradition. Differences in models also arise according to whether the monetary authority directly manipulates an interest rate or a reserve aggregate.

Suggested Citation

Hetzel, Robert L., A Critique of Theories of Money Stock Determination (October 1, 1986). Federal Reserve Bank of Richmond Working Paper No. 86-6, Available at SSRN: https://ssrn.com/abstract=2120877 or http://dx.doi.org/10.2139/ssrn.2120877

Robert L. Hetzel (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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