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Stochastic discounting and the transmission of money supply shocks

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  • Jaccard, Ivan

Abstract

This paper studies the effects of money supply shocks in a general equilibrium model that reproduces a term premium of the magnitude observed in the data. In an environment where financial frictions are the main source of monetary non-neutrality, I find that money supply shocks are less effective at stimulating inflation in recessions than in expansions. In terms of quantitative magnitude, the impact effect on inflation of a money supply shock is about half as large during recessions than during booms. This state dependence is essentially due to the time-variation in stochastic discounting that is needed to match the data. JEL Classification: E31, E44, E58

Suggested Citation

  • Jaccard, Ivan, 2018. "Stochastic discounting and the transmission of money supply shocks," Working Paper Series 2174, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182174
    Note: 737337
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    Keywords

    bond premium puzzle; euro zone economy; financial frictions; time-varying risk aversion;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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