Interpreting Money-Supply and Interest-Rate Shocks as Monetary-Policy Shocks

Topics:
Deflation
Tags:
Bank Of Canada,
Finance,
Financial Planning,
Financial Services,
Free Trade,
Investment
Source:
Bank of Canada

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Overview: In this paper two shocks are analysed using Canadian data: a money-supply shock ("M-shock") and an interest-rate shock ("R-shock"). A permanent increase in the nominal stock of M1 generates: a temporary fall in the interest rate, consistent with the liquidity effect; a temporary rise in real output; a permanent increase in the price level; and a permanent depreciation of the nominal exchange rate. A temporary positive real-interest-rate shock generates a temporary fall in money and output, but prices rise initially (a "price puzzle") before eventually declining. Both the M-shock and R-shock models are consistent with an active role for money in the transmission of monetary policy.

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Format: HTML | Size: 110KB | Date: Jul 1996 | Pages: 44

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