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The role of liquid government bonds in the great transformation of American monetary policy

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  • Canzoneri, Matthew
  • Cumby, Robert
  • Diba, Behzad
  • López-Salido, David

Abstract

A fundamental shift in monetary policy occurred around 1980: the Fed went from a "passive" policy to an "active" policy. We study a model in which government bonds provide transactions services. We present two calibrations of our model, using pre- and post-1980 data. We show that estimates of pre- and post-1980 policy rules all lie within our determinacy regions. But, the pre-1980 policy was a very bad monetary policy, even if it avoided sunspot equilibria. Model simulations suggest that household welfare would have increased by 3.3 percent of permanent consumption in this period under an active policy.

Suggested Citation

  • Canzoneri, Matthew & Cumby, Robert & Diba, Behzad & López-Salido, David, 2011. "The role of liquid government bonds in the great transformation of American monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 282-294, March.
  • Handle: RePEc:eee:dyncon:v:35:y:2011:i:3:p:282-294
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    References listed on IDEAS

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    Cited by:

    1. Massimiliano Marzo & Paolo Zagaglia, 2011. "Equilibrium Selection in a Cashless Economy with Transaction Frictions in the Bond Market," Working Paper series 28_11, Rimini Centre for Economic Analysis.
    2. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad & López-Salido, David, 2013. "Key currency status: An exorbitant privilege and an extraordinary risk," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 371-393.
    3. Falagiarda, Matteo & Saia, Alessandro, 2017. "Credit, Endogenous Collateral and Risky Assets: A DSGE Model," International Review of Economics & Finance, Elsevier, pages 125-148.
    4. Harrison, Richard, 2017. "Optimal quantitative easing," Bank of England working papers 678, Bank of England.
    5. Paulo Vieira & Celsa Machado & Ana Paula Ribeiro, 2016. "Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union," EcoMod2016 9685, EcoMod.

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    Keywords

    Price determinacy;

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