Do Monetary Aggregates Matter for Monetary Policy?

40 Pages Posted: 15 Jul 2020

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Date Written: December 12, 2019


This paper explores the role of currency and banking as competing sources of liquidity services for households within the workhorse open-economy New Keynesian model. I derive the equilibrium conditions that determine an open-economy equation of exchange and, by modeling the banking transformation of deposits into credit, I also identify a corresponding money multiplier equation. From that, I argue that in equilibrium the model establishes a link between credit and monetary aggregates on the one hand and poorly-measured global slack on the other hand that can be exploited to explain the trade-offs that monetary policy faces (particularly the open-economy Phillips curve). I also argue that ignoring the role of globalization can be an important factor in explaining the apparent poor performance of purely domestic monetary aggregates that has often been cited to motivate the use of cashless models. Finally, I conclude that monetary aggregates can be a powerful tool for monetary policymaking when global rather than domestic Divisia aggregates are considered. Moreover, I also show its significance for the design of monetary policy based on balance sheet policies and for understanding the dynamics of money and inflation.

Keywords: Open-Economy New Keynesian Model, Banking Channel, Divisia Monetary Aggregates, Monetary Aggregate.

JEL Classification: C43, E32, E41, E52

Suggested Citation

Martinez-Garcia, Enrique, Do Monetary Aggregates Matter for Monetary Policy? (December 12, 2019). Available at SSRN:

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)


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