Monetary Economics Without Santa Clause - Part One: The Neoclassical Model

Abstract

In this paper I propose a simple approach to analyze monetary policy within the framework of a neoclassical macroeconomic model without adhering to such concepts as Santa Clause money or helicopter money. A convenient side-effect of this approach is a simplification of the model structure without a loss of explanatory power. Since the approach reduces the number of macroeconomic markets from four to three, the graphical analysis of the neoclassical model is also significantly simplified. This is especially helpful for the analysis of the open economy case. It also recommends the model for teaching purposes. Furthermore, the model provides a clear empirically testable hypothesis.

Keywords: Santa Clause, neoclassical model, monetary policy, monetary analysis, central bank policy, inflation, deflation, money supply, money demand, quantity equation, stability of money demand, velocity of money, banking sector, open market operation, foreign exchange market operation, exchange rate

JEL Classification: E5, E51, E52, E58, E31