Effects of Quasi-Random Monetary Experiments

Oscar Jorda, Moritz Schularick and Alan Taylor

No 2017-02, Working Paper Series from Federal Reserve Bank of San Francisco

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: international finance; exchange rates; cross-border capital flows; trilemma mechanism; monetary interventions; historical panel data (search for similar items in EconPapers)
JEL-codes: E01 E30 E32 E44 E47 E51 F33 F42 F44 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018-05-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: First published 1/13/2017 as "Large and State-Dependent Effects of Quasi-Random Monetary Experiments ", FRBSF Working Paper 2017-02. This new version published 5/7/2018 as "The Effects of Quasi-Random Monetary Experiments" (FRBSF Working Paper 2017-02).
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: The effects of quasi-random monetary experiments (2020)
Working Paper: The effects of quasi-random monetary experiments (2017)
Working Paper: The effects of quasi-random monetary experiments (2017)
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DOI: 10.24148/wp2017-02

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