A Note on Money and the Conduct of Monetary Policy

35 Pages Posted: 13 May 2013

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Luisa Corrado

University of Rome Tor Vergata Department of Economics and Finance

Sean Holly

University of Cambridge - Department of Applied Economics

Date Written: May 13, 2013

Abstract

Prior to the fi…nancial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum’s (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to infl‡ation. We fi…nd that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a ompression of the external …finance premium, which is infl‡ationary. We consider a number of alternative monetary policy rules, and …find that a rule which exploits the joint information from money and the external fi…nance premium performs best.

Keywords: money, DSGE, policy rules, external fi…nance premium

JEL Classification: E31, E40, E51

Suggested Citation

Chadha, Jagjit S. and Corrado, Luisa and Holly, Sean, A Note on Money and the Conduct of Monetary Policy (May 13, 2013). CEIS Working Paper No. 279. Available at SSRN: https://ssrn.com/abstract=2264079 or http://dx.doi.org/10.2139/ssrn.2264079

Jagjit S. Chadha

University of St. Andrews - School of Management ( email )

The Gateway
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom
+44 1334 462440 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages/j.chadha.shtml

Luisa Corrado (Contact Author)

University of Rome Tor Vergata Department of Economics and Finance ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Sean Holly

University of Cambridge - Department of Applied Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44-1223-335251 (Phone)

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