Working Paper: NBER ID: w0528
Authors: Maurice Obstfeld
Abstract: This paper investigates the long- and short-run neutrality of open-market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. Using an illustrative portfolio-balance model, it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non-interest-bearing foreign assets, open-market policy has a short-run effect, but no long-run effect, on the domestic price level and interest rate. When the foreign-exchange intervention assets earn interest that is rebated to and capitalized by the public, open-market policy loses even its short-run efficacy -- the capital-account offset to monetary policy is complete.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic public discounts future tax liabilities (H43) | Open market operations have a short-run effect on the domestic price level (E52) |
| Domestic public discounts future tax liabilities (H43) | Open market operations have a short-run effect on the interest rate (E43) |
| Domestic public discounts future tax liabilities (H43) | Open market operations have a short-run effect on the current account (F32) |
| Domestic public discounts future tax liabilities (H43) | Open market operations have no long-run effect on the domestic price level (E59) |
| Domestic public discounts future tax liabilities (H43) | Open market operations have no long-run effect on the interest rate (E43) |
| Central bank's foreign-exchange intervention assets earn interest (F33) | Open market policy loses short-run efficacy (E65) |
| Central bank's foreign-exchange intervention assets earn interest (F33) | No change in the price level (E31) |
| Central bank's foreign-exchange intervention assets earn interest (F33) | No change in the interest rate (E43) |