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The effects of quasi-random monetary experiments

Listed author(s):
  • Òscar Jordà
  • Moritz Schularick
  • Alan M. Taylor

The trilemma of international finance entails that fluctuations in interest rates—for countries with fixed exchange rates that allow unfettered cross-border capital flows—are mostly due to international arbitrage. Consequently, we can locate a valid source of exogenous variation to identify monetary policy effects with instrumental variable methods. Paired with conventional instruments based on central bank staff forecasts, and using historical data since 1870, we estimate local average treatment effects (LATE) of monetary policy interventions for different subpopulations. Using a novel control function approach we determine the robustness of our findings to possible spillovers via alternative trade-based channels. Our results reveal and rectify attenuation bias in previous estimates, are consistent with theory, and provide a good approximation to the ATE. The effects that we report are quantitatively important and state-dependent.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23074.

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Date of creation: Jan 2017
Handle: RePEc:nbr:nberwo:23074
Note: DAE EFG IFM ME
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