Two essays in money and price level control
Description
This dissertation is comprised of two essays. The first essay uses a rational expectations-quantity theory model of inflation to develop evidence on the empirical relation between inside money, outside money, and inflation over the 1953-1986 period. The second essay extends the rational expectations literature on price level determination by including the Federal Reserve's currency policy in the specification of the monetary policy rule The results of the empirical analysis confirm that major differences exist between the impact of inside money growth and outside money growth on inflation. We find that outside money growth is the dominant monetary factor causing inflation. There is no evidence that nominal deposit growth, either narrowly or broadly defined, has an impact on U.S. inflation The results of the theoretical analysis indicate that the currency sterilization assumption is crucial to ascertaining whether or not the price level is determined, and if it is determined, which aggregate is relevant for determination. The setting of the sterilization parameter governs which nominal asset the Federal Reserve is controlling and by implication, which aggregate determines the price level. When increases in the public's demand for currency are completely sterilized by increases in reserves, the price level is determined by reserves. When there is no sterilization, the price level is determined by the monetary base. Assuming partial sterilization, the price level is not determined by either aggregate