Can central banks run out of ammunition? The money–equities interaction channel in monetary policy

Tim Congdon ()

Chapter 3 in Money and Inflation at the Time of Covid, 2025, pp 100-122 from Edward Elgar Publishing

Abstract: The chapter explains why and how changes in the value of corporate equity are affected by changes in the quantity of money, broadly defined. Even when the economy is at the “zero lower bound” or suffers from a supposed “liquidity trap”, the central bank can engineer increases in broad money, and these increases result in higher asset prices. The higher asset prices in turn boost demand, output and employment. Central banks can never run out of ammunition to boost the economy. Economists are misguided in their focus on the effect of changes in the quantity of money on bond yields (that is, on “the rate of interest”, as Keynes understood it in his 1936 General Theory).

Keywords: Liquidity trap; Bond yields; Portfolio rebalancing channel; Jay Powell; Liquidity preference theory; Dennis Robertson (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035328963
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