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LIQUIDITY, MONETARY POLICY, AND UNEMPLOYMENT: A NEW MONETARIST APPROACH

Mei Dong and Sylvia Xiaolin Xiao

International Economic Review, 2019, vol. 60, issue 2, 1005-1025

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 returns 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, firms earn less profits from production, which leads to higher unemployment. The existence of such a consumption channel can help us understand the effects of unconventional monetary policy.

Date: 2019
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International Economic Review is currently edited by Michael O'Riordan and Dirk Krueger

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