Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105578
Authors: 
Chadha, Jagjit S.
Corrado, Luisa
Holly, Sean
Year of Publication: 
2013
Series/Report no.: 
School of Economics Discussion Papers 1306
Abstract: 
Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum's (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best.
Subjects: 
money
DSGE
policy rules
external finance premium
JEL: 
E31
E40
E51
Document Type: 
Working Paper

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