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Open Market Operations as a Monetary Policy Shock Measure in a Quantitative Business Cycle Model

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  • Burkhard Heer
  • Andreas Schabert

Abstract

This paper presents a business cycle analysis of monetary policy shocks measured by disturbances to open market operations, i.e. the ratio of open market papers to non-borrowed reserves. We find empirical evidence for the usefulness of this policy measure, as it predicts significant declines in output, M1 growth, and prices, as well as a significant rise in interest rates after a monetary contraction. We develop a dynamic general equilibrium model with financial intermediation where monetary policy is conducted via open market operations. In accordance with our empirical findings, a monetary tightening leads to a fall in output, monetary aggregates, and factor prices. In contrast to an alternative model specification with money growth shocks, our model with disturbances to open market operations also generates a persistent rise of nominal and real interest rates on securities in response to a monetary contraction. Furthermore, the introduction of staggered prices is demonstra-ted to improve the model’s ability to replicate second moments of empirical time series.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 396.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_396

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Keywords: Monetary policy; financial intermediation; open market operations; business cycles; price stickiness;

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References

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Cited by:
  1. Martin Menner & Hugo Rodriguez Mendizabal, 2005. "On the Identification of Monetary (and Other) Shocks," UFAE and IAE Working Papers 650.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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