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Comparing Monetary Policy Tools in an Estimated DSGE model with International Financial Markets

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  • Gelfer, Sacha
  • Gibbs, Christopher

Abstract

We evaluate the dynamics of conventional and unconventional monetary policy using an estimated two-region dynamic stochastic general equilibrium (DSGE) model. In addition to traditional nominal frictions the open-economy model also includes financial frictions, international portfolio balance effects, and correlated global financial shocks. We find that both conventional and unconventional monetary policy is effective in stimulating output and in inflation. However, the type of expansionary monetary policy used has heterogeneous effects on domestic investment, imports, exports and hours worked. Further, including a financial accelerator to the DSGE model significantly dampens the impact of aggregate investment that is expected to occur with quantitative easing. This is because unconventional monetary policy in the model is associated with an expansion in banking deposits and a minimal impact on loan demand, thus creating a fall in the loan to deposit ratio as was seen after the global financial crisis. Using historical decompositions, we find that unconventional monetary policy had a significant positive impact on output and hours worked during the global financial crisis and the preceding years after, but becomes negligible after 2014. Yet, its impact on equity and bond markets remained through 2019.

Suggested Citation

  • Gelfer, Sacha & Gibbs, Christopher, 2021. "Comparing Monetary Policy Tools in an Estimated DSGE model with International Financial Markets," Working Papers 2021-13, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2021-13
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