Working Paper: NBER ID: w17885
Authors: Michael T. Belongia; Peter N. Ireland
Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of shocks. Finally, the analysis characterizes the optimal monetary policy response to disturbances that originate in the financial sector.
Keywords: New Keynesian model; monetary aggregates; Barnett critique; liquidity services; optimal monetary policy
JEL Codes: C43; E32; E41; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| divisia monetary aggregates (E19) | true monetary aggregates (E19) |
| simple sum measures (C29) | true monetary aggregates (E19) |
| monetary service indices (E42) | output (C67) |
| monetary policy shocks (E39) | economic output (E23) |
| financial sector disturbances (F65) | optimal monetary policy response (E63) |