Shrinking Money and the Effectiveness of Monetary Policy

Abstract

Money is shrinking. The money supply (M1) in the United States, as a fraction of the nominal value of GDP, has decreased about 70 per cent since 1952. Money has shrunk because the demand for money has fallen. Technological progress in the development of alternative means of payment, such as electronic payment systems, increased credit availability, and new cash management techniques have reduced the relative quantities of transactions measures of money held by households and businesses. Moreover, financial innovation is likely to continue, which suggests that money will become even less important as a medium of exchange in the future.

I thank Anders Vredin for very helpful suggestions on an earlier draft of this paper. I also thank Helena Matheou for helpful comments and assistance on the final draft.