Conventional notions suggest that persistently high budget deficits give rise to inflation, which monetary policy on its own is powerless to prevent. However, empirical evidence does not provide convincing support for such a hypothesis. This paper reexamines the issue in the case of Pakistan using Johansen cointegration analysis. The empirical results suggest that in the long-run inflation is n...

To come from the Bank of England to speak to the Society of Business Economists is to be a nominal economist among real economists. Businesses like yours and those who work in them are the real economythe supply sidethe workings of which ultimately determine the paths of real economic variables such as output growth, employment and productivity. The Bank’s paramount monetary policy objective ...

This paper uses a panel of state-level data to test whether changes in bank loan supply affect output. Since the U.S. states are small open economies with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using these shocks as an instrumental variable, I find that shocks to ...

Alternative panel data estimation methods are used to estimate the cointegrating equations for the demand for money (M1) for a panel of 14 Asian countries from 1970-2005. The effects of financial reforms are analyzed with estimates for two sets of sub-samples and two break dates. Our results show that money demand function has been stable and financial reforms are yet to have any significant ef...

This paper develops a Ricardian model with money to study North-South trade that is mediated by the currency of the North. The model shows that an increase in the supply of Northern money results in inflation being “exported” to the South. The increase in the supply of Northern money also has real effects: (1) it transfers real resources from the South to the North, lowers the wage rate in the ...

A theory of money needs a proper place for financial intermediaries. Intermediaries diversify risks and create inside money. In downturns, micro-prudent intermediaries shrink their lending activity, fire-sell assets and supply less inside money, exactly when money demand rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. Shocks are amplified, volatility spikes an...

This paper considers an economy in which the financial system provides intermediary services for founded and unfounded assets. Founded assets have real investments as underlying, the unfounded assets have not. Money is used for real and financial transactions. In particular, the money supplied to the financial system may be used to honor the payoff promises of unfounded assets rather than being...

This paper proposes a model that explains the nonneutrality of money from two welldocumented psychological assumptions. The model incorporates into the general-equilibrium monopolistic-competition framework of Blanchard and Kiyotaki [1987] the psychological assumptions that (1) consumers dislike paying a price that exceeds some “fair” markup on firms’ marginal costs, and (2) consumers do not kn...

Prior to the …nancial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum’s (2007) DSGE model, we examine the circumstances under which mon...