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The E-Monetary Theory

Ngotran, Duong (2017): The E-Monetary Theory.

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Abstract

We build a dynamic monetary model with two types of electronic money: reserves for transactions between bankers and zero-maturity deposits for transactions in the non-bank private sector. Using this model, we discuss about unconventional monetary policy during the Great Recession. Committing to keep the federal funds rate at the zero lower bound for a long time is very effective in the short run, but it creates deflation and lowers output in the long run. At the time of raising interest on reserves, if the central bank also commits to target the growth of money supply in responding to inflation, both output and inflation paths will be smooth. In short, “raise rate and raise money supply” is a good way to get out of the zero lower bound.

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