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The Role of Money

The Role of Money

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Published by Guillermo Pereyra

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Published by: Guillermo Pereyra on Oct 16, 2012
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09/16/2013

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The Role of Money in New-Keynesian Models
Bennett T. McCallumCarnegie Mellon University and NBER Prepared for presentation at the Central Bank of Peru, October 5, 2012
 
1. Introduction
Topic (suggested by Marco Vega) is interesting and can possibly bediscussed in a way that may be understandable widely and yet be of interest to CB monetary economists. For the non-economists here, Ishould mention that NK models typically do not even refer to money!Before 1993 academic economists modeled and thought of mon polin terms of growth rates of money supply—quantity of money. Therewere different measures used for different purposes but most academicstudies focused on some M, and viewed mon pol as control of M
t
. The policy effects were often described in this way: if the CB increases the
 
amount of money in the economy it spurs spending: people need onlyso much money to carry out their spending activities conveniently. So if more is supplied they will want to lend some of it and these offers will push interest rates down, inducing others to borrow and spend more thanotherwise.CB economists thought of mon pol in terms of interest rates. For them, easy money was not a rapid growth rate of some M but instead alow value of some key interest rate—which would push other rates lower and induce more spending. Also other differences but ….Thus there was not much fruitful interaction between CBs and

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