TY - JOUR
T1 - The Monetary Transmission Mechanism
AU - Benhabib, Jess
AU - Farmer, Roger E.A.
N1 - Funding Information:
1We thank Guido Ascari, Craig Burnside, Michael Castanheira, Jordi Gali, and a referee and associate editor of the Re iew of Economic Dynamics for very helpful comments. We thank the C. V. Starr Center for Applied Economics at New York University, the European University Institute, and the Academic Senate at UCLA for technical and financial support. Farmer’s research was supported by N.S.F. Grant 952912 and by the Research Council of the European University Institute.
PY - 2000/7
Y1 - 2000/7
N2 - Recent literature on structural vector autoregressions has attempted to identify the effects on the economy of an increase in the stock of money. This work has led to a broad consensus. Initially, an increase in money leads to an increase in economic activity. Output and employment go up, the interest rate declines, and prices respond weakly, if at all. Over time, these real effects die out and, in the long run, the only effect of higher money is higher prices. Most writers on the topic have attributed the real effects of money, in the short run, to a barrier of some kind that prevents markets from clearing. We show instead that a competitive market-clearing model in which money enters the production function can reproduce the broad features of data. Our argument exploits the existence of multiple equilibria in a rational-expectations model. Journal of Economic Literature Classification Numbers: E00, E4.
AB - Recent literature on structural vector autoregressions has attempted to identify the effects on the economy of an increase in the stock of money. This work has led to a broad consensus. Initially, an increase in money leads to an increase in economic activity. Output and employment go up, the interest rate declines, and prices respond weakly, if at all. Over time, these real effects die out and, in the long run, the only effect of higher money is higher prices. Most writers on the topic have attributed the real effects of money, in the short run, to a barrier of some kind that prevents markets from clearing. We show instead that a competitive market-clearing model in which money enters the production function can reproduce the broad features of data. Our argument exploits the existence of multiple equilibria in a rational-expectations model. Journal of Economic Literature Classification Numbers: E00, E4.
KW - Sunspots; indeterminacy; business fluctuations
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U2 - 10.1006/redy.2000.0100
DO - 10.1006/redy.2000.0100
M3 - Article
AN - SCOPUS:0001106166
SN - 1094-2025
VL - 3
SP - 523
EP - 550
JO - Review of Economic Dynamics
JF - Review of Economic Dynamics
IS - 3
ER -