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The effects of quasi-random monetary experiments

Jord�, Ï¿½scar, Moritz Schularick and Alan M. Taylor
Authors registered in the RePEc Author Service: Oscar Jorda ()

No 11801, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The trilemma of international finance entails that fluctuations in interest rates for countries with fixed exchange rates that allow unfettered cross-border capital flows are mostly due to international arbitrage. Consequently, we can locate a valid source of exogenous variation to identify monetary policy effects with instrumental variable methods. Paired with conventional instruments based on central bank staff forecasts, and using historical data since 1870, we estimate local average treatment effects (LATE) of monetary policy interventions for different subpopulations. Using a novel control function approach we determine the robustness of our findings to possible spillovers via alternative trade-based channels. Our results reveal and rectify attenuation bias in previous estimates, are consistent with theory, and provide a good approximation to the ATE. The effects that we report are quantitatively important and state-dependent.

Keywords: fixed exchange rates; instru- mental variables; interest rates; local average treatment effect; local projections; monetary experiments; trilemma (search for similar items in EconPapers)
JEL-codes: E01 E30 E32 E44 E47 E51 F33 F42 F44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: 2017-01
References: View references in EconPapers View complete reference list from CitEc
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