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Large and State-Dependent Effects of Quasi-Random Monetary Experiments

Oscar Jorda (), Moritz Schularick () and Alan M. Taylor ()
Additional contact information
Moritz Schularick: Department of Economics, University of Bonn, https://sites.google.com/site/moritzschularick/
Alan M. Taylor: University of California, Davis, Postal: University of California, Davis, Department of Economics and Graduate School of Management, 1 Shields Avenue, Davis, CA 95616,, http://economics.ucdavis.edu/people/amtaylor

No 2017-2, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Fixing the exchange rate constrains monetary policy. Along with unfettered cross-border capital flows, the trilemma implies that arbitrage, not the central bank, determines how interest rates fluctuate. The annals of international finance thus provide quasi-natural experiments with which to measure how macroeconomic outcomes respond to policy rates. Based on historical data since 1870, we estimate the local average treatment effect (LATE) of monetary policy interventions and examine its implications for the population ATE with a trilemma instrument. Using a novel control function approach we evaluate the robustness of our findings to possible spillovers via alternative channels. Our results prove to be robust. We find that the effects of monetary policy are much larger than previously estimated, and that these effects are state-dependent.

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 and nep-mon
Date: 2017-01-13
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DOI: 10.24148/wp2016-02

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