The Supply of Transaction Assets, Nominal Income, and Monetary Policy Transmission

Over the last few years, the Federal Reserve has conducted a series of large scale asset purchases. Given the Federal Reserve’s dual mandate, the objective of this policy has been to generate an increase in real economic activity while maintaining a low, stable rate of inflation. In addition, some such as Sumner (2011, 2012) and Woodford (2012) have advocated making such large scale asset purchases conditional upon a particular target for nominal income. Whether this type of policy can be successful is dependent upon the monetary transmission mechanism. This paper proposes a mechanism in which monetary policy works through current and expected growth in the supply of transaction assets and nominal income expectations. Empirical results focusing on the role of nominal income expectations provide support for the theoretical framework.