Stochastic discounting and the transmission of money supply shocks
Ivan Jaccard ()
No 2174, Working Paper Series from European Central Bank
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)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20182174
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