a detailed analysis of the Gramley-Chase model ABe and AY. This information has not been pro demonstrates that it implies the following reduced by the authors. form equations explaining the money stock(M)and Most interesting is another aspect of the model bank credit(E)in terms of the extended monetary which was not clarified by the authors. Their model E=h(Be, Y,c) h>0> h2, and h1> g1, cyclical movements in AM. This model exemplifying base(Be),the level of economic activity expressed the New view thus yields little justification for the by national income at current prices(),and the ceiling rate on time deposits(c). 14 conjectures of its proponents The Gramley-Chase model implies that monetary A central property of the Gramley-Chase model policy does affect the money stock and bank credit must be considered in the light of the programmatic statements characterizing the New View. Gramley It also implies that the money stock responds posi- Chase do not differentiate between the public's asset tively and bank credit negatively to economic activity. This model thus differs from the Monetarist hypothe- This procedure violates the basic program of the ses which imply that both bank credit and the money New View, namely, to apply economic analysis to an stock respond positively to economic activity. The array of financial assets and financial institutions Gramley-Chase model also implies that the responses Economic analysis implies that the public's asset sup of both the money stock and bank credit to mone- ply and money demand are distinct, and not identical tary actions are independent of the general scale of behavior patterns. This difference in behavior pat the public's and the banks'interest elasticities. Uni- terns is clearly revealed by different responses of formly large or small interest elasticities yield the esired money balances and desired asset supply to same response in the money stock or bank credit to specific stimuli in the environment. For instance,an a change in the monetary base. increase in the expected real yield on real capita A detailed discussion of the implications derivable raises the public's asset supply but lowers the public's from a meaningfully supplemented Gramley-Chase money demand. It follows thus that a central analy model is not necessary at this point. We are foremost tical feature of the Gramley-Chase model violates the propositions mentioned in the previous paragraph. View sic and quite relevant program of the New interested in the relation between this model and the The first proposition can be interpreted in two differ Kareken s construction shares this fundamental ent ways. According to one interpretation, it could analytical flaw with the Gramley. Chase model, but mean that the marginal multpliers g and h(i=1, 2) this is not the only problem faced by his analysis are functions of the banksand the public's response The Kareken analysis proceeds on two levels. First, patterns expressing various types of substitution rela- he derives a representative bank's desired balance tions between different assets. This interpretation is, sheet position. For this purpose he postulates wealth however, quite innocuous and yields no differentia tion relative to the questioned hypotheses of the maximization subject to the banks balance sheet Monetarist position. relation between assets and liabilities, and subject to reserve requirements on deposits. On closer examina A second interpretation suggests that the growth tion, this analysis is only applicable to a monopoly ate of the money stock is dominated by the second bank with no conversion of deposits into currency component (changes in income) of the differential or reserve fows to other banks. In order to render expression the analysis relevant for a representative bank in △M=g1△B+g2△Y the world of reality, additional constraints would This result is not actually implied by the gramley have to be introduced which modify the results quite Chase model, but it is certainly consistent with the substantially. It is also noteworthy that the structural model. However, in order to derive the desired result, properties, assigned by Kareken to the system of their model must be supplemented with special as- sumptions about the relative magnitude of g, and g2, implications one can derive from the author's analy and also about the comparative cyclical variability of Iis of firm behavior developed on the first level of his investigation 13In the Gramley-Chase model, g3 and h3 are indeterminant This disregard for the construction of an economic r listed in foot theory relevant for the real world is carried into the reserves by cha liberated from or impounded into related second level of analysis where the author formulates system of relations describing the joint determina Page 14A detailed analysis of the Graniley-Chase model demonstrates that it implies the following reduced form equations explaining the money stock (M) and bank credit (E) in terms of the extended monetary M=g(BC, Y, c) g1 >0 C g2, E =h(Be, Y, c) h1 > 0 > h2 , and h1 > g1 13 base (Be), the level of economic activity expressed by national income at current prices (Y), and the ceiling rate on time deposits (c).’4 The Gramley-Chase model implies that monetary policy does affect the money stock and bank credit. It also implies that the money stock responds posi￾tively and bank credit negatively to economic activity. This model thus differs from the Monetarist hypothe￾ses which imply that both bank credit and the money stock respond positively to economic activity. The Gramley-Chase model also implies that the responses of both the money stock and bank credit to mone￾tary actions are independent of the general scale of the public’s and the banks’ interest elasticities. Uni￾formly large or small interest elasticities yield the same response in the money stock or bank credit to a change in the monetary base. A detailed discussion of the implications derivable from a meaningfully supplemented Gramley-Chase model is not necessary at this point. We are foremost interested in the relation between this model and the propositions mentioned in the previous paragraph. The first proposition can be interpreted in two differ￾ent ways. According to one interpretation, it could mean that the marginal multipliers g5 and h1 (i = 1, 2) are functions of the banks’ and the public’s response patterns expressing various types of substitution rela￾tions between different assets. This interpretation is, however, quite innocuous and yields no differentia￾tion relative to the questioned hypotheses of the Monetarist position. A second interpretation suggests that the growth rate of the money stock is dominated by the second component (changes in income) of the differential expression: AM = g1 ABC + g2 AY This result is not actually implied by the Gramley￾Chase model, but it is certainly consistent with the model. However, in order to derive the desired result, theft model must be supplemented with special as￾sumptions about the relative magnitude of g, and g 2, and also about the comparative cyclical variability of 181n the Gramley-Chase model, g~and h 3 are indeterminant. t4This implication was demonstrated in my paper listed in foot￾note 12. The monetary base is adjusted for the accumulated sum of reserves liberated from or impounded into required reserves by changes in requirement ratios. ABC and AY. This information has not been provided by the authors. Most interesting is another aspect of the model which was not clarified by the authors. Theft model implies that policymakers could easily avoid pro￾cyclical movements in AM. This model exemplifying the New View thus yields little justification for the conjectures of its proponents. A central property of the Gramley-Chase model must be considered in the light of the programmatic statements characterizing the New View. Gramley￾Chase do not differentiate between the public’s asset supply to banks and the public’s demand for money. This procedure violates the basic program of the New View, namely, to apply economic analysis to an array of financial assets and financial institutions. Economic analysis implies that the public’s asset sup￾ply and money demand are distinct, and not identical behavior patterns. This difference in behavior pat￾terns is clearly revealed by different responses of desired money balances and desired asset supply to specific stimuli in the environment. For instance, an increase in the expected real yield on real capital raises the public’s asset supply but lowers the public’s money demand. It follows thus that a central analy￾tical feature of the Gramley-Chase model violates the basic and quite relevant program of the New View. Kareken’s construction shares this fundamental analytical flaw with the Gramley-Chase model, but this is not the only problem faced by his analysis. The Kareken analysis proceeds on two levels. First, he derives a representative bank’s desired balance sheet position. For this purpose he postulates wealth maximization subject to the bank’s balance sheet relation between assets and liabilities, and subject to reserve requirements on deposits. On closer examina￾tion, this analysis is only applicable to a monopoly bank with no conversion of deposits into currency or reserve flows to other banks. In order to render the analysis relevant for a representative bank in the world of reality, additional constraints would have to be introduced which modify the results quite substantially. it is also noteworthy that the structural properties assigned by Kareken to the system of market relations are logically inconsistent with the implications one can derive from the author’s analy￾sis of finn behavior developed on the first level of his investigation. This disregard for the construction of an economic theory relevant for the real world is carried into the second level of analysis where the author formulates a system of relations describing the joint determina￾Page 14