MONETARY CHANNELS AND THE RELATIVE IMPORTANCE OF MONEY SUPPLY AND BANK PORTFOLIOS.

In traditional IS-LM analysis monetary policy affects GNP through changes in the money supply (and the resulting impact on "the" rate of interest and investment spending). At the same time, monetary economists have increasingly concerned themselves with the composition of bank portfolios and bank portfolio behavior. The Federal Reserve, also, has paid particular attention to the loan portfolio of commercial banks in its assessment of monetary ease or tightness. The question to which this paper is addressed is, what is the relative importance of bank portfolio composition and the money supply in evaluating the impact of monetary policy? in particular, does the relative importance of these two financial variables vary with how one views the channels through which monetary policy operates? To point up the question even further one may ask, does it matter in evaluating the impact of monetary policy whether an expansion (contraction) in money supply occurs through the banking system's purchase (sale) of securities from (to) the public or whether it increases (decreases) loans? We shall ask also whether it is important to distinguish between different types of loans. Although the ultimate solution to these questions lies in empirical tests, this paper attempts only to clarify the issues with respect to the prevailing theories as to how monetary policy affects real spending. [ABSTRACT FROM AUTHOR]