Working Paper: CEPR ID: DP2241
Authors: Jos Vials; Javier Valls
Abstract: This paper is an attempt to provide an updated assessment of what we know and what do not know about the impact of monetary policy on the economy and what implications follow for the conduct of monetary policy in today's world. Firstly, we discuss the conditions under which monetary policy can be expected to affect the economy, both over the medium term and the short term, and review the most policy-relevant empirical results, providing some new evidence. Secondly, we analyze the implications that the empirical regularities have for the practical conduct of monetary policy. We focus on whether the existence of short-run real effects can and should be exploited by central banks and whether the impact of monetary policy on the economy may be affected by the present circumstances of low rates of inflation and low nominal interest rates.
Keywords: monetary policy; real effects; central banks
JEL Codes: E50; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| non-systematic monetary policy actions (E52) | temporary real effects on output (E39) |
| monetary loosening (E52) | output expansion (E23) |
| non-systematic monetary policy actions (E52) | misperceptions among the public (D83) |
| systematic monetary policy actions (E52) | temporary impacts on output (F69) |
| credibility of the monetary authority (E58) | effectiveness of monetary policy in influencing output (E52) |
| speed of price and wage adjustments (E64) | effectiveness of monetary policy in influencing output (E52) |
| monetary policy tightening (E63) | output exhibits a hump-shaped response (C51) |
| output exhibits a hump-shaped response (C51) | returns to baseline (D50) |
| price adjustments lag behind output changes (E31) | price adjustments take two years or more to fully materialize (L11) |
| systematic or anticipated monetary actions (E52) | output effects take longer to manifest (F69) |
| low inflation environments (E31) | over-reliance on monetary policy for stimulating economic activity (E49) |
| over-reliance on monetary policy (E52) | higher inflation without sustainable real gains (E31) |