Monetary Regimes, Money Supply and the US Business Cycle since 1959: Implications for Monetary Policy Today
Lars Christensen, Markets & Money Advisory Founder and CEO, LC@mamoadvisory.com, @
I have co-authored a new working paper with Hylton Hollander who is a Lecturer at Stellenbosch University.
Hylton will present the paper next week at at the 49th Money, Macro and Finance Annual Conference to be held at King’s College London.
Follow Hylton on Twitter here.
See the abstract here.
To justify the operational procedures of central banks since the 2008 global financial crisis, reputable academics and practitioners proclaim the independence of interest rate policy from all things monetary. This policy debate can be traced as far back as Thorn-ton (1802), Pigou (1917), Tinbergen (1939, 1951), and Poole (1970). Central to this debate is the effect of the choice by the monetary authority between reserves and interest rate manipulation. Using U.S. data spanning 50 years, we estimate a dynamic general equilibrium model and show that the type of monetary policy regime has significant implications for the role of monetary aggregates and interest rate policy on the U.S. business cycle. The interaction between money supply and demand and the type of monetary regime in our model does remarkably well to capture the dynamics of the U.S. business cycle. The results suggest that the evolution toward a stricter interest rate targeting regime renders central bank balance sheet expansions superfluous. In the context of the 2007−09 global financial crisis, a more flexible interest rate targeting regime would have led to a significant monetary expansion and more rapid economic recovery in the U.S. JEL codes: E32, E41, E42, E52, E58, N12
Read the paper here.