February 27 Lecture Notes: The Monetary Side

Lecture Audio

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Background and Models

American Post-WWII Inflation, 1951-1994

• MV = PY
• µ + v = π + n + g

• What determines V (and v)?

  • "Shoe leather" and other costs: V is an increasing function of the nominal interest rate i
  • What is i? i = r + µ
  • "Banking technologies"

• P = MV(r+π)/Y

• π = µ - g - n + v

• Comparative statics:

  • The level M of the money stock can suddenly and unexpectedly jump
  • The rate of growth µ of the money stock can change
  • The level V of velocity can suddenly and unexpectedly jump
  • The rate of change v of velocity can change

A Change in the Rate of Money Growth...

• What happens if the money supply is expected to jump at some time in the future?

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