Monetary Aggregates and Monetary Policy
Recently, there has been renewed interest in the identification of monetary policy disturbances. This involves a search for a variable (or combination of variables) to appropriately measure the stance — the looseness or tightness — of monetary policy. Over the years many variables have been used for this purpose. For example, monetarist authors of the 1960s and 1970s, such as Friedman and Schwartz (1963) and Cagan (1972), emphasized monetary aggregates (like M1 and M2) as indicators of policy. In particular, they argued that such money measures lead output and prices and also are positively related to changes in output (at least in the short run) and to changes in the price level (at least in the long run).
KeywordsIncome Cross Correlation Librium DICA
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