NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inside Money, Outside Money and Short Term Interest Rates

V. V. Chari, Lawrence J. Christiano, Martin Eichenbaum

NBER Working Paper No. 5269
Issued in September 1995
NBER Program(s):   EFG   ME

This paper presents a quantitative general equilibrium model with multiple monetary aggregates. The framework incorporates a banking sector and distinguishes between M1, the monetary base, currency and various measures of reserves: total, excess and non borrowed. We use a variant of the model to analyze two sets of empirical facts. The first set of facts is that different monetary aggregates covary differently with short term nominal interest rates. Broad monetary aggregates like M1 and the monetary base covary positively with current and future values of short term interest rates. In contrast, the non borrowed reserves of banks covary negatively with current and future interest rates. Observations like this `sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. According to our model, the sign switch occurs because movements in non borrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and M1 are dominated by endogenous responses to non-policy shocks. The second set of facts that we consider is that broad monetary aggregates covary positively with output. We quantify the Friedman and Schwartz hypothesis that this covariation reflects the effects of exogenous shocks to monetary policy, and the hypothesis that they reflect the endogenous response of monetary aggregates to shocks in the private economy.

download in pdf format
   (544 K)

email paper

This paper is available as PDF (544 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5269

Published:

  • Proceedings, Federal Reserve Bank of Cleveland, 1994, pp. 1354-1401. ,
  • Journal of Money, Credit and Banking, vol. 27, no. 4, part 2, (November 1995), pp. 1354-1386

Users who downloaded this paper also downloaded these:
Hartley and Walsh w1890 Inside Money and Monetary Neutrality
Christiano and Eichenbaum w3974 Liquidity Effects and the Monetary Transmission Mechanism
King and Plosser w0853 The Behavior of Money, Credit, and Prices in a Real Business Cycle
Bernanke, Gertler, and Gilchrist w6455 The Financial Accelerator in a Quantitative Business Cycle Framework
Christiano, Eichenbaum, and Evans w8403 Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us