Working Paper: NBER ID: w1084
Authors: Alan S. Blinder; Joseph E. Stiglitz
Abstract: When government expenditures exceed current tax revenues, the resulting deficit must be financed either by issuing bonds, which imply obligations to levy future taxes, or by creating high-powered money. The choice between money and bonds is often thought to be of great moment for both real and nominal variables; that is, monetary policy matters.There is by now a wide empirical consensus that monetary policy has effects on real variables like output and employment. But there is far less agreement about why this is so. The purpose of this paper is to take issue with some currently fashionable views of why money has real effects,and to suggest a new theory, or rather resurrect an old one--the loanable funds theory--and give it new, improved microfoundations.
Keywords: Monetary Policy; Credit Constraints; Economic Activity
JEL Codes: E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Output (Y10) |
| Monetary policy (E52) | Employment (J68) |
| Open market operations (E52) | Bank lending (G21) |
| Bank lending (G21) | Investment activities (G24) |
| Investment activities (G24) | Recession (E32) |
| Monetary policy (E52) | Economic activity (E29) |
| Credit market segmentation (G19) | Availability of credit (G21) |
| Availability of credit (G21) | Economic activity (E29) |
| Imperfect information (D83) | Credit rationing (G21) |
| Expectations dynamics (D84) | Real effects of monetary policy (E52) |