Chapter 30

The US Inflation Rate


The strict monetarist view assumes that money is only a veil and has no effect on the real economy. The textbook assumptions associated with the monetarist model help us identify the relevant aggregates. The monetarists assume that through open market operations, the Fed controls the monetary base. Through the discount window and reserve requirements, the Fed controls the money multiplier. It also assumes that the demand for money is stable (i.e., the velocity is assumed to be constant). A floating exchange rate isolates the domestic economy from the rest of the world’s monetary shocks. The relaxation of these different assumptions gives rise to alternative specifications regarding the appropriate monetary ...

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