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 byproduct 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 Friedman, Milton ed. 1957 Studies in the Quantity Theory of Money Friedman, M. and Anna Schwartz 1963 A Monetary History of the United States Econometrica 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 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. Meisselman 1963 The Relative Stability of Monetary Velocity and the Investment Multiplier Commission on 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 Econometrica FRBStL Review Poole, Wm. and Edith Kornblith 1973 The Friedman-Meisselman CMC Paper: New Evidence on an Old Controversy AER Tobin, James 1969 A General Equilibrium Approach to Monetary Theory JMCB Modigliani, Franco 1971 Monetary Policy and Consumption, in Consumer Spending & Monetary Policy FRBB Lucas, Robert 1976 Econometric Policy Evaluation: A Critique Carnegie-Rochester King, R. and Charles Plosser ‘89 Plosser, Charles 1989 Money, Credit and Prices in a Real Business Cycle Understanding Real Business Cycles AER 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
