Liquidity, Monetary Policy and Unemployment: A New Monetarist Approach

Mei Dong () and Sylvia Xiao ()
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Mei Dong: Department of Economics, University of Melbourne
Sylvia Xiao: School of Economics, Auckland University of Technology

No 2017-07, Working Papers from Auckland University of Technology, Department of Economics

Abstract: We discover a consumption channel of monetary policy in a model with money and government bonds. When the central bank withdraws government bonds (short-term or long-term) through open market operations, it lowers re- turns on bonds. The lower return has a direct negative impact on consumption by households that hold bonds, and an indirect negative impact on consumption by households that hold money. As a result, fi rms earn less pro fits from production, which leads to higher unemployment. The existence of such a consumption channel can help us understand the e¤ects of unconventional monetary policy.

Keywords: interest rate; monetary policy; consumption; unemployment (search for similar items in EconPapers)
JEL-codes: E24 E40 E50 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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