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Monitoring Money for Price Stability

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  • Constantino Hevia
  • Juan Pablo Nicolini

Abstract

In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.

Suggested Citation

  • Constantino Hevia & Juan Pablo Nicolini, 2017. "Monitoring Money for Price Stability," Working Papers 744, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:744
    DOI: 10.21034/wp.744
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    References listed on IDEAS

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    1. Benati, Luca & Lucas, Robert E. & Nicolini, Juan Pablo & Weber, Warren, 2021. "International evidence on long-run money demand," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 43-63.
    2. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
    3. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    4. Fernando Alvarez & Francesco Lippi, 2009. "Financial Innovation and the Transactions Demand for Cash," Econometrica, Econometric Society, vol. 77(2), pages 363-402, March.
    5. Finn E. Kydland & Scott Freeman, 2000. "Monetary Aggregates and Output," American Economic Review, American Economic Association, vol. 90(5), pages 1125-1135, December.
    6. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, June.
    7. Lucas, Robert E. & Nicolini, Juan Pablo, 2015. "On the stability of money demand," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 48-65.
    8. Luca Benati & Robert E. Lucas & Juan Pablo Nicolini & Warren E. Weber, 2017. "Online Appendix for: International Evidence on Long-Run Money Demand," Working Papers 738, Federal Reserve Bank of Minneapolis.
    9. Barry Z. Cynamon & Donald H. Dutkowsky & Barry E. Jones, 2006. "Redefining the Monetary Agggregates: A Clean Sweep," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 661-672, Fall.
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    Cited by:

    1. Gerdesmeier Dieter & Roffia Barbara & Reimers Hans-Eggert, 2020. "Unravelling the Secrets of Inflation in the Euro Area – A Frequency Decomposition Approach," Folia Oeconomica Stetinensia, Sciendo, vol. 20(1), pages 133-162, June.

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    More about this item

    Keywords

    Inflation; Money demand; Currency in circulation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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