The Three Tenets of Monetary Policy

Abstract

Monetary policy has three tenets: a stable money demand function, a well specified velocity of money and a reliable money creation process. The first tenet determines real money on the demand side of the market and the third fixes nominal money on the supply side. The article finds that these two tenets are present and operative. As for the second tenet, this article is one of the rare studies to test the specification of Friedman (1956), which distinguishes between the effects of transitory and permanent scales of transactions on velocity. The empirical results support this specification quite strongly. The article concludes that monetary policy in Lebanon is feasible, effective, can be independent and should be used for economic stabilisation. The state of the financial markets, as of late, indicates that monetary policy was successful in stabilising prices, inflation and foreign exchange rates and in ending the convalescence period that came after the disastrous economic experience of the war years (1975 to 1990).

Keywords

JEL Classification: E41 JEL Classification: E51 JEL Classification: E22 Monetary policy money demand velocity money supply Lebanon

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