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Channels of Monetary Influence

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					• The Keynesian Framework: A Structural Model
              Y = C + I + G + NX
             C = c0 + mpc (Y - T)
               I = I0 - b1i + b2Y
    The Monetarist Framework: A Black Box
                   MV = PY
… Speculators may do no harm as bubbles on a stream of
 steady enterprise. But the position is serious when
 enterprise becomes a bubble on a whirlpool of speculation.
 When the capital development of a country becomes a by-
 product of the activities of a casino, the job is likely to be
 ill-done.
                                         John Maynard Keynes
      The General Theory of Employment, Interest and Money
                  Channels of Monetary Influence: Follow the Footnotes

Keynes, John Maynard      1936   The General Theory of Employment, Interest and Money
Hicks, John               1937   Mr. Keynes and the Classics: A Suggested Interpretation   Econometrica
Friedman, Milton ed.      1957   Studies in the Quantity Theory of Money
Friedman, M. and Anna
Schwartz                  1963   A Monetary History of the United States
        Keynesian - Monetarist Debates
• Keynesians: Monetary policy does not matter
  – Low interest rates during the Great Depression 
    expansionary monetary policy  didn’t help
  – Nominal interest rates don’t affect investment
     • Surveys confirmed investment in physical capital not
       based on market interest rates
• Monetarists: Money matters most
• Depression -- The Great Contraction
  – Deflation  high real interest rates
  – Interest-rate effects are only one of many channels
           • But is there reverse causation?
                    Beware Financial Instability!
• … small events at times have large consequences, there are
  such things as chain reactions and cumulative forces. It
  happens that a liquidity crisis in a fractional reserve banking
  system is precisely the kind of event that can trigger – and often
  has triggered – a chain reaction. And economic collapse often
  has the character of a cumulative process. Let it go beyond a
  certain point, and it will tend for a time to gain strength from its
  own development as its effects spread and return to intensify
  the process of collapse. Because no great strength would be
  required to hold back the rock that starts a landslide, it does not
  follow that the landslide will not be of major proportions.
       • Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United
         States, 1867 – 1960, p. 419.
                    Channels of Monetary Influence: Follow the Footnotes

Keynes, John Maynard             1936    The General Theory of Employment, Interest and Money
Hicks, John                      1937    Mr. Keynes and the Classics: A Suggested Interpretation                     Econometrica
Friedman, Milton ed.             1957    Studies in the Quantity Theory of Money
Friedman, M. and Anna
Schwartz                         1963    A Monetary History of the United States


Tobin, James                     1970    Money and Income: Post Hoc, Ergo Proctor Hoc                                QJE


Friedman, M. and D.                                                                                                  Commission on
Meisselman                       1963    The Relative Stability of Monetary Velocity and the Investment Multiplier   Money & Credit
Ando, A. and Franco
Modigliani                       1965    The Relative Stability of Monetary Velocity and the Investment Multiplier   AER

Andersen, L. and Jerry Jordan    1968    Monetary and Fiscal Actions: A Test of Their Relative Importance            FRBStL Review

                                         The Friedman-Meisselman CMC Paper: New Evidence on an Old
Poole, Wm. and Edith Kornblith   1973    Controversy                                                                 AER


Tobin, James                     1969    A General Equilibrium Approach to Monetary Theory                           JMCB

                                          Monetary Policy and Consumption, in Consumer Spending & Monetary
 Modigliani, Franco               1971    Policy                                                                      FRBB


 Lucas, Robert                    1976    Econometric Policy Evaluation: A Critique                                   Carnegie-Rochester


 King, R. and Charles Plosser     ‘89    Money, Credit and Prices in a Real Business Cycle                           AER

 Plosser, Charles                1989    Understanding Real Business Cycles                                          AER
                                             Channels of Monetary Influence: Follow the Footnotes

Romer, D. and Christina Romer      ‘89    Does Monetary Policy Matter?                                                  NBER Macro Annual



Blanchard, O. and Larry Summers    ‘84    Perspectives on High World Interest Rates                                     Brookings Papers

Huizinga, J. and Fredric Mishkin   ’86    Monetary Regime Shifts and the Unusual Behavior of Real Interest Rates        Carnegie-Rochester

Mishkin, Fredric                   1981   The Real Interest Rate                                                        Carnegie-Rochester



Bosworth, Barry                    1975   The Stock Market and the Economy                                              Brookings Papers

Taylor, John                       1995   The Monetary Transmission Mechanism: An Empirical Framework                   JEP

Bernanke, B. and Mark Gertler      1995   Inside the Black Box: The Credit Channel of Monetary Transmission             JEP

Bryant R., Hooper and Mann         1993   Evaluating Policy Regimes

Taylor, John                       1993   Macroeconomic Policy in a World Economy

Tobin, James                       1969   A General Equilibrium Approach to Monetary Theory                             JMCB

Bosworth, Barry                    1975   The Stock Market and the Economy                                              Brookings Papers

Modigliani, Franco                 1971   Monetary Policy and Consumption, in Consumer Spending & Monetary Policy       FRBB

Bernanke, Ben                      1993   Credit in the Macroeconomy                                                    FRBNY Quarterly Review

Cecchetti, Stephern                1995   Distinguishing Theories of Monetary Transmission Mechanisms                   FRBStL Review

Hubbard, R. Glenn                  1995   Is There a "Credit Channel" for Monetary Policy?                              FRBStL Review

Ramey, Valery                      1993   How Important is the Credit Channel in the Transmission of Monetary Policy?   Carnegie-Rochester

Meltzer, Allan                     1995   Monetary, Credit and (Other) Transmission Processes: A Monetarist View        JEP

Mishkin, Fredric                   1978   The Household Balance Sheet and the Great Depression                          Jrl. of Economic History

Mishkin, Fredric                   1977   What Depressed the Consumer: The Hshld Balance Sheet and 1973-75 Recess       Brookings Papers

Gertler, M. and Simon Gilchrist    1994   Monetary Policy, Business Cycles, and the Behavior of Small Mfg. Firms        QJE



Ito, T. and Fredric Mishkin        2004   Two Decades of Japanese Monetary Policy and the Deflation Problem             NBER WP # 10878
          Lessons for Monetary Policy
• Don’t associate the stance of monetary policy
  with ups and downs of short-term nominal
  interest rates
• Other asset prices are important elements in
  various monetary policy transmission
  mechanisms
  – Monetary policy can be highly effective in reviving
    a weak economy even if short-term interest rates
    are already near zero
  – Pump up liquidity … pump up asset prices
   Lessons for Monetary Policy
             (cont’d)
• Monetary policy can be highly effective in
  reviving a weak economy even if short-term
  interest rates are already near zero
• Avoiding unanticipated fluctuations in the price
  level is an important objective of monetary
  policy, thus providing a rationale for price
  stability as the primary long-run goal for
  monetary policy

				
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