Direct Effects of Money on Aggregate Demand: Another Look at the Evidence

Stephen Elias and Mariano Kulish
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Stephen Elias: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Now that a number of central banks are faced with short-term nominal interest rates close to or at the zero lower bound, there is a renewed interest in the long-running debate about whether or not changes in the stock of money have direct effects. In particular, do changes in money have additional effects on aggregate demand outside of those induced by changes in short-term nominal interest rates? This paper revisits and reinterprets the empirical evidence based on single equation regressions which is quite mixed, with some results supporting and other results denying the existence of direct effects. We use a structural model with no direct effects of money to show that the finding of positive and statistically significant coefficients on real money growth can be misleading. The model generates data that, when used to estimate analogs of the empirical regressions, produce positive and statistically significant coefficients on real money growth, similar to those often found when using actual data. The problem is that single equation regressions leave out a set of variables, which in turn, gives rise to an omitted variables bias in the estimated coefficients on real money growth. Hence, they are an unreliable guide to calibrate monetary policies, in general, including at the zero lower bound.

Keywords: money; monetary base; direct effects; output gap (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Direct effects of money on aggregate demand: another look at the evidence (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2010-05

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