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Stochastic discounting and the transmission of money supply shocks

Ivan Jaccard ()

No 2174, Working Paper Series from European Central Bank

Abstract: This paper studies the effects of money supply shocks in a general equilibrium model that reproduces a term premium of the magnitude observed in the data. In an environment where financial frictions are the main source of monetary non-neutrality, I find that money supply shocks are less effective at stimulating inflation in recessions than in expansions. In terms of quantitative magnitude, the impact effect on inflation of a money supply shock is about half as large during recessions than during booms. This state dependence is essentially due to the time-variation in stochastic discounting that is needed to match the data. JEL Classification: E31, E44, E58

Keywords: bond premium puzzle; euro zone economy; financial frictions; time-varying risk aversion (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2018-08
Note: 737337
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20182174

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