Market participants recognize two opposing effects of money supply growth on interest rates: a temporary liquidity effect and a permanent expectations effect. That the latter dominates in the long run is clear — a sustained increase in money growth causes proportionally higher interest rates...

I build a general equilibrium model of the transmission of monetary policy on bank lending. Bank lending is done by individual banks that face random investment opportunities by creating inside money. Banks are subject to a reserve requirement and have access to the interbank money market. The...