EconLit Content Type: Working Papers in Economics

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Sample EconLit Working Paper Record

TITLE: Monetary Policy without Money: Hamlet without the Ghost

AUTHOR: Laidler, David

AFFILIATION: University of Western Ontario

SOURCE: University of Western Ontario, Department of Economics, UWO Department of Economics Working Papers: 20037

DOCUMENT TYPE: Working Paper

DATE: 2003

ABSTRACT: Today's standard model of monetary policy has aggregate demand responding directly to an interest rate under the central bank's control, and ignores the role played by the quantity of money in the transmission mechanism. Even though monetary policy is usually aimed at controlling price level behaviour, and the price level is appropriately modelled as being determined by the interaction of the supply and demand for money, it is going too far to characterise this standard model as "Hamlet without the prince". Canadian experience shows that the current framework has worked too well, and its predecessor, based on money growth targeting, worked too badly for this to be fair. Nevertheless, inflation is a monetary phenomenon, and monetary aggregates continue to have useful leading indicator properties. These facts, among others, suggest that a theory of monetary policy which pays explicit attention to the money supply permits a coherent understanding of monetary policy issues. The neglect of money by current approaches leads to a fragmented analysis of monetary policy, just as the omission of the Ghost's demand for vengeance from a production of Hamlet would undermine the play's coherence.


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UPDATE: 200404