The Future of Monetary Aggregates in Monetary Policy Analysis

44 Pages Posted: 26 Jun 2003

See all articles by Edward Nelson

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: May 2003

Abstract

This Paper considers the role of monetary aggregates in modern macroeconomic models of the New Keynesian type. The focus is on possible developments of these models that are suggested by the monetarist literature, and that in addition seem justified empirically. Both the relation between money and inflation, and between money and aggregate demand, are considered. Regarding the first relation, it is argued that both the mean and the dynamics of inflation in present-day models are governed by money growth. This relationship arises from a conventional aggregate-demand channel; an emphasis on the link between monetary aggregates and inflation in no way requires a direct channel connecting money and inflation. The relevance of money for aggregate demand, in turn, lies not via real balance effects (or any other justification for money in the structure of the IS equation), but on money's ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand. This role for monetary aggregates, which is supported by empirical evidence, enhances the value of money to monetary policy.

Keywords: Money, inflation, monetary aggregates, Taylor rules, transmission mechanism

JEL Classification: E52, E58

Suggested Citation

Nelson, Edward, The Future of Monetary Aggregates in Monetary Policy Analysis (May 2003). Available at SSRN: https://ssrn.com/abstract=420161

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