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Liquidity, Monetary Policy, And Unemployment: A New Monetarist Approach

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  • Mei Dong
  • Sylvia Xiaolin Xiao

Abstract

We discover a consumption channel of monetary policy in a model with money and government bonds. When the central bank withdraws government bonds (short‐term or long‐term) through open market operations, it lowers returns on bonds. The lower return has a direct negative impact on consumption by households that hold bonds and an indirect negative impact on consumption by households that hold money. As a result, firms earn less profits from production, which leads to higher unemployment. The existence of such a consumption channel can help us understand the effects of unconventional monetary policy.

Suggested Citation

  • Mei Dong & Sylvia Xiaolin Xiao, 2019. "Liquidity, Monetary Policy, And Unemployment: A New Monetarist Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(2), pages 1005-1025, May.
    • Handle: RePEc:wly:iecrev:v:60:y:2019:i:2:p:1005-1025
    DOI: 10.1111/iere.12374
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    Cited by:

    1. Ait Lahcen, Mohammed & Baughman, Garth & Rabinovich, Stanislav & van Buggenum, Hugo, 2022. "Nonlinear unemployment effects of the inflation tax," European Economic Review, Elsevier, vol. 148(C).
    2. Lucas Herrenbrueck, Zijian Wang, 2023. "Interest Rates, Moneyness, and the Fisher Equation," Discussion Papers dp23-11, Department of Economics, Simon Fraser University.
    3. Carli, Francesco & Gomis-Porqueras, Pedro, 2021. "Real consequences of open market operations: The role of limited commitment," European Economic Review, Elsevier, vol. 132(C).
    4. Dhital, Saroj & Gomis-Porqueras, Pedro & Haslag, Joseph H., 2021. "Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking," European Economic Review, Elsevier, vol. 139(C).
    5. I. I. Belyaev & A. V. Larionov & S. N. Sil’vestrov, 2021. "Assessment of the State of Economic Security in Russia Using the Example of the Unemployment Rate Indicator: Fractal Analysis Method," Studies on Russian Economic Development, Springer, vol. 32(2), pages 141-146, March.
    6. Dominguez, Begona & Gomis-Porqueras, Pedro, 2023. "Accessing U.S. Dollar Swap Lines: Macroeconomic Implications for a Small Open Economy," MPRA Paper 118293, University Library of Munich, Germany.
    7. Mohammed Ait Lahcen & Garth Baughman & Hugo van Buggenum, 2023. "Racial Unemployment Gaps and the Disparate Impact of the Inflation Tax," Opportunity and Inclusive Growth Institute Working Papers 073, Federal Reserve Bank of Minneapolis.

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