A Finance Theory of Monetary Policy in a World Without Money

This paper introduces a finance channel for monetary policy. Following Black (1970) there is no money commodity in the paper's model. Instead, the medium of exchange is bank deposits supplied by the financial system in response to optimal rational expectations decisions by firms about financing investment in new capital assets, and demanded by households as part of their optimized financial portfolio of accumulated savings. The model demonstrates how central banks maintain price stability through changes in base interest rates (the Wicksell monetary policy rule) which influence the debt financing decisions of firms.


Issue Date:
May 01 2000
Publication Type:
Working or Discussion Paper
Language:
English
Total Pages:
25
JEL Codes:
E31; E51; E52
Series Statement:
2000/04




 Record created 2017-10-02, last modified 2017-10-02

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