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Role of money in the monetary policy: A New Keynesian and new monetarist perspective

Author

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  • Masudul Hasan Adil

    (Mumbai School of Economics and Public Policy, University of Mumbai)

  • Neeraj R. Hatekar

    (Mumbai School of Economics and Public Policy, University of Mumbai)

  • Taniya Ghosh

    (Indira Gandhi Institute of Development Research)

Abstract

In the recent scenario, one of the most pertinent changes in monetary economics has been the virtual disappearance of what was once a dominant focus, the role of money in monetary policy, and in parallel, the disappearance of the LM curve. Economists used to think about issues of monetary policy with the help of the LM curve as being part of the analytical framework which captures the demand for money. However, the workhorse model of modern monetary theory and policy, the New Keynesian Dynamic Stochastic General Equilibrium framework only comprises of, a dynamic aggregate demand (or the dynamic IS) curve, an aggregate supply (or the New Keynesian Phillips) curve, and a monetary policy rule. The monetary policy rule is generally the Taylor rule that relates the nominal interest rate to the output gap and inflation gap, but typically not to either the quantity or the growth rate of money. This change in the modern monetary model reflects how the central banks make monetary policy now. The present study provides a detailed discussion on the role of money in monetary policy formulation, in the context of New Keynesian and New Monetarist perspective. The pros and cons of abandonment of money or the LM curve from monetary policy models have been discussed in detail.

Suggested Citation

  • Masudul Hasan Adil & Neeraj R. Hatekar & Taniya Ghosh, 2020. "Role of money in the monetary policy: A New Keynesian and new monetarist perspective," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-005, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2020-005
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    More about this item

    Keywords

    Money; DSGE; New Keynesian; new monetarist; LM curve and Monetary policy;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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