Book Description

This series of essays explores the soundness of the Alternative Monetary Model (AMM) of Smithin (2013, 2018) via an examination of the monetary policy and monetary transmission mechanism in Canada. The AMM has assumptions that are more consistent with the real world than other approaches to macroeconomics and monetary theory, and the reliability of the AMM through the business cycle will be examined. The model was tested using abduction and numerical methods. The results were also tested econometrically, and the predictions of the directional change of the variables were found to have an accuracy of 91%. Historical simulations were conducted to examine the ability of the AMM to mimic the time profiles of actual economic events. The simulations indicate that if the central bank were to have implemented a real interest rate rule during these historical periods, there would have been better economic outcomes. The monetary transmission mechanism between the Bank of Canada and commercial banks is examined. Evidence suggests this relationship has changed over the period of study and that monetary policy changes have affected commercial bank activities more swiftly since the 1980s. Additional evidence supporting the endogeneity of the money supply was found. Debt dynamics were examined, and certain convergence conditions for debt-to-GDP ratios were established. In almost all cases balanced budgets are not necessary to maintain a stable debt-to-GDP ratio. In much of the existing theoretical literature, it is assumed that interest rates are greater than the growth rate to maintain the assumptions of the transversality conditions, the no-Ponzi constraint, and Ricardian equivalence. However, it was found that in half of the periods studied, Canadas real interest rates were less than the real growth rate violating these assumptions. Monetary policy was found to have a significant effect on government interest rates, whereas fiscal policy was only found to have a marginal effect. This lends credence to the idea that monetary policy should play a critical supporting role in government debt sustainability, through a real interest rate rule, as this has a strong effect on both interest rates at commercial banks and bond yields throughout the economy.