The Barnett Critique After Three Decades: A New Keynesian Analysis
This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of shocks. Finally, the analysis characterizes the optimal monetary policy response to disturbances that originate in the financial sector.
The authors would like to thank William Barnett and John Conlon for extremely useful discussions and David Laidler and two anonymous referees for very helpful comments on previous drafts of this paper. The opinions, findings, conclusions, and recommendations expressed herein are our own and do not reflect those of the National Bureau of Economic Research.
“The Barnett Critique After Three Decades: A New Keynesian Analysis” (co-authored with Michael T. Belongia), Journal of Econometrics, forthcoming. citation courtesy of