Channels of Monetary Influence: A Survey*

MONG the numerous controversies surrounding “money’, few are further from resolution than the is-sue of how money affects the economy. Compounding the controversy is the Fact that the arguments ad~ vanced are not divided neatly along so-called mone-tarist and nonmonetanst lines. but are separated by other criteria. To be sure, rnonetansts have long taken exception to the intellectual straitjacket of the Keynesian framework which limited the influence of monetary actions to the response of investment to iiflerest rate changes. However, the monetarIst alternatives offered have been far from uniform. Certainly, monetary ac-tions result in the change of more than one relative price — the interest rate and one type of spending — investment. However, substantial disagreement among rnonetansts (as sveii as other economists) per-sists beyond this point. There is basic agreement that at less than full em-p]oyment, chai~gesin the rate of growth of the money supply affect output and employment before prices, a proposition which may be traced back at least two hundred years (Flume [48}), but this tells nothing about how total spending and its components react to monetary actions, It is necessary to examine the changes in relative prices arid wealth associated with monetary impulses to gail) insight into the money— spending relalion. When the existing money stock (however defined) either exceeds or falls short of the quantity demanded, wealih and/ui ’ relative prices change and this sets off 1)0th substitution and wealth effects, as indicated in the a000mpallyrng diagram) The changes in relative *11w author acknowledges the hdpful comments on earlie