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Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model

Publication Date
  • E5 - Monetary Policy
  • Central Banking
  • And The Supply Of Money And Credit
  • E4 - Money And Interest Rates
  • Economics
  • Political Science


A model of monetary exchange with private financial intermediation is constructed. Claims on financial intermedaries of two types are traded in transactions: circulating notes and deposits. There can be a role for the government in supplying liqudity, and level changes in the money supply accomplished through open market operations can be nonneutral. A Friedman rule is suboptimal, due to costs of maintaining the stock of currency. The model is used to address some issues related to current monetary policy in the United States.

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