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The effects of quasi-random monetary experiments

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Listed:
  • Òscar Jordà
  • Moritz Schularick
  • Alan M. Taylor

Abstract

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.

Suggested Citation

  • Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2017. "The effects of quasi-random monetary experiments," NBER Working Papers 23074, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23074 Note: DAE EFG IFM ME
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    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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