The Monetary Transmission Mechanism

CEPR Discussion Paper Series No. 1404

Posted: 16 Dec 1996

See all articles by Jess Benhabib

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Roger E. A. Farmer

University of California, Los Angeles (UCLA) - Department of Economics; University of Warwick; National Institute of Economic and Social Research (NIESR); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 1996

Abstract

In this paper we take as given that market economies are characterized by a set of stylized responses to increases in the stock of money. Innovations to the stock of money lead to increased output and reductions in short-term interest rates in the short run and only in the long run do nominal prices respond. These features of the monetary transmission mechanism have been discussed at least since David Hume. Most authors have attributed the real effects of money in the short run either to mistaken expectations or to non- market clearing or both. In this paper we argue that neither of these channels is needed to explain the facts. We show that a competitive market clearing model in which money enters the production function is fully capable of mimicking the broad features of the data. Our argument relies on an explanation of 'price stickiness' that exploits a multiplicity of equilibria in a rational expectations model.

JEL Classification: E00, E4

Suggested Citation

Benhabib, Jess and Farmer, Roger E.A., The Monetary Transmission Mechanism (May 1996). CEPR Discussion Paper Series No. 1404, Available at SSRN: https://ssrn.com/abstract=3600

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Roger E.A. Farmer (Contact Author)

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National Institute of Economic and Social Research (NIESR) ( email )

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Centre for Economic Policy Research (CEPR)

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