Chapter 37

Monetary Policy and the Interaction Between the Money and Credit Markets


The propagation of monetary and credit shocks to other sectors of the economy is something that concerns us. What we have in mind is that under fractional reserve banking, the provision of transaction money (MZM) and credit creation are linked together. This fact alone suggests that policymakers must take into consideration that disturbances in a market can be propagated to other markets based on the degree of substitutability between the market where the disturbance originated and other markets. The central bankers should also keep in mind the interconnection between the two. Disturbances in one market will affect the equilibrium conditions in the other ...

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