A Critique of Theories of Money Stock Determination
Federal Reserve Bank of Richmond Working Paper No. 86-6
33 Pages Posted: 24 Oct 2012
Date Written: October 1, 1986
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.
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