Money, Credit and Velocity

Many critics of monetary policy have asserted that the links between monetary aggregates and national economic policy variables, such as inflation and real economic growth, have been severed by a host of financial and credit market innovations. In this analysis, a theoretical framework is provided w...

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Bibliographic Details
Published in:Review - Federal Reserve Bank of St. Louis 1982-05, Vol.64 (5), p.21
Main Author: Ott, Mack
Format: Article
Language:English
Subjects:
Credit
Credit policy
GNP
Gross National Product
Growth
Monetary policy
Money supply
Trends
Velocity
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Summary:Many critics of monetary policy have asserted that the links between monetary aggregates and national economic policy variables, such as inflation and real economic growth, have been severed by a host of financial and credit market innovations. In this analysis, a theoretical framework is provided with which to assess these claims and to examine empirical evidence bearing on their purported policy consequences. Three different procedures are used to assess the impact of rising credit on the relationship between money and income: 1. a consideration of the levels of gross national product (GNP), money, and credit, 2. an examination of consumer deposit holdings, credit extensions, and purchases, and 3. observations of the growth rates of M1 and M2 velocities. The analysis shows that because credit's mediation function depends crucially on the predictable source of monetary settlement, there is no theoretical support for assertions that the increasing use of credit has severed money's link to income. For 1981, both M1 and M2 velocities grew reasonably close to their trend rates, which is grossly inconsistent with assertions that monetary policy is ineffective. Thus, there appears to be no reason for abandoning the use of a monetary aggregate as the vehicle for monetary policy.
ISSN:0014-9187
2163-4505