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MONETARY POLICY: It’s essential to consider the transactions role of money

  • Published Date: September 2015

The extent to which consumers use cash in their transactions should be an important consideration in monetary policy-making, according to research by Alexander Kriwoluzky and Christian Stoltenberg, published in the September 2015 Economic Journal. Their study shows that in the 1970s, money was essential for purchasing consumption goods, which suggests that the muted response to inflation by US monetary policy-makers at that time served to stabilise the economy.

What about more recent times? The authors note that in the years since the financial crisis began, the stock of the US monetary aggregate M1 has increased from $1,375bn at the end of 2007 to $2,629bn at the end of 2013 – changes that have renewed interest in the role of money for monetary policy. At the same time, central banks all over the world have refrained from fighting inflation aggressively.

Whether this policy has a stabilising or destabilising effect ultimately depends on the role of money, the researchers conclude. If the increase in money is accompanied with an increasing importance of money in transactions, then the current response of central banks to inflation can be supported as a stabilising device.

The role of money has substantially changed over the last four decades. Innovations in transactions technologies have resulted in a declining importance of money as a means of transactions.

One example is the dramatic increase in the diffusion of bank branches and automatic teller machines (ATMs). A higher diffusion of ATMs and bank branches indicates smaller fixed costs of transactions for consumers, allowing for more transactions and lower average money holdings. After the installation of the first ATMs in the United States at the beginning of the 1970s, the ATM density rose from one machine per 100,000 adults in 1973 to 171 machines per 100,000 adults in 2008.

The authors incorporate an explicit transactions role for money into an otherwise standard model widely used for the analysis of monetary policy. This generalisation of the model allows the authors to discriminate between two views on monetary policy in the 1970s.

The conventional view is that the muted response to inflation by US monetary policy introduced additional uncertainty and therefore destabilised the economy. The alternative view is that the muted response of monetary policy had a stabilising effect if money played an important role in transactions.

Letting the US data from 1964 to 2008 speak to the model, the authors show that the importance for purchasing consumption goods has indeed declined. In the 1970s, money was essential for purchasing consumption goods.

Correspondingly, the authors find support for the second hypothesis – that monetary policy stabilised the economy. Furthermore, they find that from the 1980s onwards, central banks should react aggressively to inflationary tendencies so as to stabilise the economy.


Notes for editors: ‘Monetary Policy and the Transaction Role of Money in the US’ by Alexander Kriwoluzky and Christian Stoltenberg is published in the September 2015 issue of the Economic Journal.

Alexander Kriwoluzky is at the Martin-Luther-Universität Halle-Wittenberg. Christian Stoltenberg is at the University of Amsterdam.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email:; Twitter: @econromesh); Alexander Kriwoluzky via email:; or Christian Stoltenberg via email: