The Future of Monetary Aggregates in Monetary Policy Analysis


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; claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation, are wide of the mark. The relevance of money for aggregate demand, in turn, lies not via real balance effects (or any other justification for money in 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.

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@inproceedings{Nelson2002TheFO, title={The Future of Monetary Aggregates in Monetary Policy Analysis}, author={Edward Nelson and Peter N. Ireland and David Laidler and Paul De Grauwe and William DeWald and C. A. Goodhart and Amit Kara and Stuart J. Lee and Kosuke Aoki}, year={2002} }