The effects of quasi-random monetary experiments

Alan Taylor, Moritz Schularick and Oscar Jorda

No 11801, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The trilemma of international finance explains why interest rates in countries that fix their exchange rates and allow unfettered cross-border capital flows are largely outside the monetary authority’s control. Using historical panel-data since 1870 and using the trilemma mechanism to construct an external instrument for exogenous monetary policy fluctuations, we show that monetary interventions have very different causal impacts, and hence implied inflation-output trade-offs, according to whether: (1) the economy is operating above or below potential; (2) inflation is low, thereby bringing nominal rates closer to the zero lower bound; and (3) there is a credit boom in mortgage markets. We use several adjustments to account for potential spillover effects including a novel control function approach. The results have important implications for monetary policy.

Keywords: Interest rates; Monetary experiments; Trilemma; Fixed exchange rates; Instrumental variables; Local projections; Local average treatment effect (search for similar items in EconPapers)
JEL-codes: E01 E30 E32 E44 E47 E51 F33 F42 F44 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: The effects of quasi-random monetary experiments (2020)
Working Paper: Effects of Quasi-Random Monetary Experiments (2018)
Working Paper: The effects of quasi-random monetary experiments (2017)
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