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Can Monetary Policy Affect The Real Economy?

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  • Philip Arestis
  • Malcolm Sawyer

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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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_355.

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Date of creation: Sep 2002
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Handle: RePEc:lev:wrkpap:wp_355

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(4), pages 1661-1707, December.
  2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(2), pages 97-116, Spring.
  3. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  4. van Els, Peter J. A. & Locarno, Alberto & Morgan, Julian & Villetelle, Jean-Pierre, 2001. "Monetary policy transmission in the euro area: What do aggregate and national structural models tell us?," Working Paper Series, European Central Bank 0094, European Central Bank.
  5. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  6. Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series, European Central Bank 0114, European Central Bank.
  7. Atish Ghosh & Steven Phillips, 1998. "Warning: Inflation May Be Harmful to Your Growth," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 672-710, December.
  8. 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, Federal Reserve Bank of New York, issue May, pages 15-26.
  9. Philip Arestis & Kevin McCauley & Malcolm Sawyer, 2000. "An Alternative Stability Pact for the European Union," Economics Working Paper Archive, Levy Economics Institute wp_296, Levy Economics Institute.
  10. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(4), pages 3-10, Fall.
  11. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
  12. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  13. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series, European Central Bank 0091, European Central Bank.
  14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  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, University of Manchester, vol. 70(4), pages 528-45, Special I.
  16. Paul A. Volcker, 2002. "Monetary policy transmission: past and future challenges," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 7-11.
  17. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 435-39, May.
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Cited by:
  1. Giuseppe Fontana & Bill Gerrard, 2006. "The future of Post Keynesian economics," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 59(236), pages 49-80.
  2. 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], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of G 200807211614210, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. Greg Hannsgen, 2005. "Minsky's acceleration channel and the role of money," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 27(3), pages 471-489, April.
  4. Philip Arestis & Malcolm Sawyer, 2003. "Does the stock of money have any causal significance?," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 56(225), pages 113-136.
  5. 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.
  6. Philip Arestis & Malcolm Sawyer, 2010. "What Monetary Policy after the Crisis?," Review of Political Economy, Taylor & Francis Journals, Taylor & Francis Journals, vol. 22(4), pages 499-515.
  7. Philip Arestis & Malcolm Sawyer, 2003. "The Case for Fiscal Policy," General Economics and Teaching, EconWPA 0306005, EconWPA.
  8. Philip Arestis & Malcolm Sawyer, . "Reforming the Euro's Institutional Framework," Economics Policy Note Archive, Levy Economics Institute 03-2, Levy Economics Institute.
  9. Mohd Zaini Abd Karim & Amy Azhar Mohd Harif & Azira Adziz, 2006. "Monetary Policy and Sectoral Bank Lending in Malaysia," Global Economic Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(3), pages 303-326.
  10. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics, EconWPA 0407026, EconWPA.
  11. Philip Arestis & Malcolm Sawyer, 2004. "On the Effectiveness of Monetary Policy and of Fiscal Policy," Review of Social Economy, Taylor & Francis Journals, Taylor & Francis Journals, vol. 62(4), pages 441-463.
  12. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown: A Structural Policy Bias Coming Home to Roost?," Economics Working Paper Archive, Levy Economics Institute wp_409, Levy Economics Institute.
  13. Philip Arestis & Malcolm Sawyer, . "European Integration and the 'Euro Project'," Economics Policy Note Archive, Levy Economics Institute 02-3, Levy Economics Institute.

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