Monetary policy and the transaction role of money in the United States

We argue that the declining importance of money in saving transaction costs can explain the well-known fact that U.S. interest rate policy was passive in the pre-Volcker period and active after 1982. To identify the declining role of money in transactions as the driving force for the change in interest rate policy, we develop a model in which the relative importance of money to purchase consumption goods is pivotal for the impact and the propagation of exogenous shocks. We estimate this model and find support for our hypothesis. Our finding implies that the interest rate policy before Volcker did not give rise to sunspot uctuations but ensured determinacy.