Show Me the Money. Why Neglecting Money in Monetary Theory and Policy is a Bad Idea

Olivo, Victor (2023): Show Me the Money. Why Neglecting Money in Monetary Theory and Policy is a Bad Idea.

Abstract

This paper discusses numerous and serious conceptual criticisms of arguments and theories that consider that inflation and the price level are exclusively a fiscal phenomenon in which money plays no distinctive role. The price level, substantial acceleration of the inflation rate or sustained inflation rates of two digits or more cannot be explained by expectations or changes in expectations alone as Sargent (1982), Woodford (2008) and the FTPL proponents claim. The empirical evidence obtained using cointegration and error correction models estimated using linear and non-linear techniques provides robust indication that money plays a crucial role in understanding the long-run evolution of the price level and the short-run dynamics of inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Price Level; Inflation; Monetarism, Monetary, Monetary Base, Monetary Policy, Money, Money Stock.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Aiyagari, S. R., & Gertler, M. (1985). The backing of government bonds and monetarism. Journal of Monetary Economics, 16(1), 19-44.

Aksoy, Y., & Piskorski, T. (2006). US domestic money, inflation and output. Journal of Monetary Economics, 53(2), 183-197.

Borio, C., Hofmann, B., & Zakrajšek, E. (2023). Does money growth help explain the recent inflation surge? (No. 67). Bank for International Settlements.

Brunner, K., & Meltzer, A. H. (1997). Money and the economy: issues in monetary analysis. Cambridge University Press.

Buiter, W. H. (1998). The young person's guide to neutrality, price level indeterminacy, interest rate pegs, and fiscal theories of the price level.

Buiter, W. H. (1999). The fallacy of the fiscal theory of the price level.

Buiter, W. H. (2004). A Small Corner of Intertemporal Public Finance-New Developments in Monetary Economics: 2 Ghosts, 2 Eccentricities, A Fallacy, A Mirage and A Mythos.

Buiter, W. H. (2017). The Fallacy of the Fiscal Theory of the Price Level-Once More.

Cagan, P. (1956). The monetary dynamics of hyperinflation. Studies in the Quantity Theory if Money.

Canzoneri, M. B., Cumby, R. E., & Diba, B. T. (2001). Is the price level determined by the needs of fiscal solvency?. American Economic Review, 91(5), 1221-1238.

Cochrane, J. H. (2007). Inflation determination with Taylor rules: A critical review. Available at SSRN 1012165.

Cochrane, J. H. (2023). The fiscal theory of the price level. Princeton University Press.

Friedman, M. (1960). A program for monetary stability (No. 3). Fordham University Press.

Gerlach, S., & Svensson, L. E. (2003). Money and inflation in the euro area: a case for monetary indicators?. Journal of Monetary Economics, 50(8), 1649-1672.

Granger, C. W. (1997). On modelling the long run-in applied economics. The Economic Journal, 107(440), 169-177.

King, M. (2022). Monetary policy in a world of radical uncertainty. Economic Affairs, 42(1), 2-12.

Klein, M. W., & Shambaugh, J. C. (2010). Exchange Rate Regimes in the Modern Era, volume 1 of MIT Press Books.

Koch, C., & Noureldin, D. (2023). How We Missed the Recent Inflation Surge. Finance and Development (March 2023). International Monetary Fund.

Leeper, E. M. (1991). Equilibria under ‘active’and ‘passive’monetary and fiscal policies. Journal of monetary Economics, 27(1), 129-147.

Leeper, E. M. Monetary-Fiscal Policy Interactions for Central Bankers.

McCallum, B. T. (2010). Is the spurious regression problem spurious?. National Bureau of Economic Research, Working Paper 15690.

McCallum, B. T., & Nelson, E. (2005). Monetary and fiscal theories of the price level: the irreconcilable differences. Oxford Review of Economic Policy, 21(4), 565-583.

Mendoza, E. G., & Ostry, J. D. (2008). International evidence on fiscal solvency: Is fiscal policy “responsible”?. Journal of Monetary Economics, 55(6), 1081-1093.

Moll, B. Greg Kaplan, Benjamin Moll and Giovanni L. Violante. The Very Model of Modern Monetary Policy. Finance and Development (March 2023). International Monetary Fund.

Nelson, E. (2003). The future of monetary aggregates in monetary policy analysis. Journal of Monetary Economics, 50(5), 1029-1059.

Olivo, V. (2011). The role of money in economies with monetary policy regimes that ignore monetary aggregates. MPRA paper, 41244.

Olivo, V. (2011). Tópicos avanzados de teoría y política monetaria. Editorial Arte Professional.

Olivo, V. (2021). Hiperinflación en Venezuela: un análisis con base al marco conceptual de Cagan. Crecimiento Económico, Intermediación Financiera e Inflación. Un Análisis Empírico para Venezuela: 1950-2019. Document not published.

Sargent, T. J. (1982). The ends of four big inflations. In Inflation: Causes and effects (pp. 41-98). University of Chicago Press.

Sargent, T. J., & Wallace, N. (1981). Some unpleasant monetarist arithmetic. Federal reserve bank of minneapolis quarterly review, 5(3), 1-17.

Sims, C. A. (1994). A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic theory, 4, 381-399.

Smets, F., & Wouters, R. (2003). An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European economic association, 1(5), 1123-1175.

Woodford, M. (1995, December). Price-level determinacy without control of a monetary aggregate. In Carnegie-Rochester conference series on public policy (Vol. 43, pp. 1-46). North-Holland.

Woodford, M. (2003). INTEREST & PRICES. Foundations of a Theory of Monetary Policy. Princeton University Press.

Woodford, M. (2008). How important is money in the conduct of monetary policy?. Journal of Money, credit and Banking, 40(8), 1561-1598.