DP10250 Monetarism rides again? US monetary policy in a world of Quantitative Easing

Author(s): Vo Phuong Mai Le, David Meenagh, Patrick Minford
Publication Date: November 2014
Keyword(s): crises, DSGE model, financial frictions, fiscal multiplier, indirect inference, monetary policy, money supply, QE, zero bound
JEL(s): C1, E3, E44, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10250

This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.