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Can Monetary Policy Affect The Real Economy?

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Author Info
Philip Arestis
Malcolm Sawyer

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Abstract

Current monetary policy involves the manipulation of the Central Bank interest rate (the repo rate), with the specific objective of achieving the goal(s) of monetary policy. The latter is normally the inflation rate, although in a number of instances this may include the level of economic activity (the U.S. Federal Reserve monetary policy is a good example of this category). This raises two issues. The first is the theoretical underpinnings of this mode of monetary policy. The second is the channels of monetary policy or, more concretely, the channels through which changes in the rate of interest may affect the ultimate goal(s) of policy. Both aspects are investigated in this paper. Furthermore, we suggest that it is imperative to consider the empirical estimates of the effects of monetary policy. We summarise results drawn from the eurozone, the U.S. and the UK and suggest that these empirical results point to a relatively weak effect of interest rate changes on inflation. We also suggest, on the basis of the evidence adduced in the paper, that monetary policy can have long-run effects on real magnitudes. This particular result does not fit comfortably with the theoretical basis of current thinking on monetary policy.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number 355.

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Date of creation: Sep 2002
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Handle: RePEc:lev:wrkpap:355

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kenneth N. Kuttner & Patricia C. Mosser, 2002. "The monetary transmission mechanism: some answers and further questions," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 15-26. [Downloadable!]
  2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
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  3. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  6. Frank Smets & Gert Peersman, 2001. "The monetary transmission mechanism in the Euro area: more evidence from VAR analysis (MTN conference paper)," Working Paper Series 091, European Central Bank. [Downloadable!]
  7. Ignazio Angeloni & Benoit Mojon & Anil K. Kashyap & Daniele Terlizzese, 2002. "Monetary transmission in the Euro Area: where do we stand?," Working Paper Series 114, European Central Bank. [Downloadable!]
  8. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May. [Downloadable!] (restricted)
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  9. Bernanke, Ben S & Mishkin, Frederic S, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring. [Downloadable!] (restricted)
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  10. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  11. Julian Benedict Morgan & Alberto Locarno & Jean-Pierre Villetelle & Peter van Els, 2001. "Monetary policy transmission in the Euro area: what do aggregate and national structural models tell us?," Working Paper Series 094, European Central Bank. [Downloadable!]
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  12. Mishkin, Frederic S, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall. [Downloadable!] (restricted)
  13. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16. [Downloadable!]
  14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  15. Arestis, Philip & Caporale, Guglielmo Maria & Cipollini, Andrea, 2002. "Does Inflation Targeting Affect the Trade-Off between Output Gap and Inflation Variability?," Manchester School, University of Manchester, vol. 70(4), pages 528-45, Special I. [Downloadable!] (restricted)
  16. Paul A. Volcker, 2002. "Monetary policy transmission: past and future challenges," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 7-11. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philip Arestis, Malcolm Sawyer, . "Reforming the Euro's Institutional Framework," Economics Policy Note Archive 03-2, Levy Economics Institute, The. [Downloadable!]
  2. Jšrg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown: A Structural Policy Bias Coming Home to Roost?," Economics Working Paper Archive 409, Levy Economics Institute, The. [Downloadable!]
  3. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics 0407026, EconWPA. [Downloadable!]
  4. Philip Arestis, Malcolm Sawyer, . "European Integration and the 'Euro Project'," Economics Policy Note Archive 02-3, Levy Economics Institute, The. [Downloadable!]
  5. Greg Hannsgen, 2003. "Minsky's Acceleration Channel and the Role of Money," Economics Working Paper Archive 384, Levy Economics Institute, The. [Downloadable!]
    Other versions:
  6. Sheila Dow & Matthias Klaes & Alberto Montagnoli, 2007. "Risk and Uncertainty in Central Bank Signals: An Analysis of MPC Minutes," Keele Economics Research Papers KERP 2007/05, Centre for Economic Research, Keele University. [Downloadable!]
  7. Gilberto Libânio, 2008. "A Note on Inflation Targeting and Economic Growth in Brazil," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211614210, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  8. Mohd Zaini Abd Karim & Amy Azhar Mohd Harif & Azira Adziz, 2006. "Monetary Policy and Sectoral Bank Lending in Malaysia," Global Economic Review, Taylor and Francis Journals, vol. 35(3), pages 303-326, September. [Downloadable!] (restricted)
  9. Philip Arestis, Malcolm Sawyer, 2003. "Reinventing Fiscal Policy," Economics Working Paper Archive 381, Levy Economics Institute, The. [Downloadable!]
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  10. Philip Arestis & Malcolm Sawyer, 2002. "Does The Stock of Money Have Any Causal Significance," Economics Working Paper Archive 363, Levy Economics Institute, The. [Downloadable!]
  11. Pui Chi Ip, 2004. "Inflation and Growth Targeting," Research Papers 0401, Macquarie University, Department of Economics. [Downloadable!]
  12. Philip Arestis, Malcolm Sawyer, 2003. "Inflation Targeting: A Critical Appraisal," Economics Working Paper Archive 388, Levy Economics Institute, The. [Downloadable!]
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  13. Philip Arestis & Malcolm Sawyer, 2002. "'New Consensus,' New Keynesianism, and the Economics of the 'Third Way'," Economics Working Paper Archive 364, Levy Economics Institute, The. [Downloadable!]
  14. Philip Arestis, Malcolm Sawyer, 2003. "The Case for Fiscal Policy," Economics Working Paper Archive 382, Levy Economics Institute, The. [Downloadable!]
    Other versions:
  15. Gilberto Libanio, 2005. ""Good governance" in monetary policy and the negative real effects of inflation targeting in developing economies," Textos para Discussão Cedeplar-UFMG td277, Cedeplar, Universidade Federal de Minas Gerais. [Downloadable!]
  16. Philip Arestis & Malcolm Sawyer, 2004. "On the Effectiveness of Monetary Policy and of Fiscal Policy," Review of Social Economy, Taylor and Francis Journals, vol. 62(4), pages 441-463, December. [Downloadable!] (restricted)
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