Working Paper: NBER ID: w13502
Authors: Lawrence Christiano; Roberto Motto; Massimo Rostagno
Abstract: We describe two examples which illustrate in different ways how money and credit may be useful in the conduct of monetary policy. Our first example shows how monitoring money and credit can help anchor private sector expectations about inflation. Our second example shows that a monetary policy that focuses too narrowly on inflation may inadvertently contribute to welfare-reducing boom-bust cycles in real and financial variables. The example is of some interest because it is based on a monetary policy rule fit to aggregate data. We show that a policy of monetary tightening when credit growth is strong can mitigate the problems identified in our second example.
Keywords: monetary policy; money; credit; inflation expectations; economic cycles
JEL Codes: E41; E44; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monitoring money and credit (E50) | anchoring private sector inflation expectations (E31) |
| central bank reacts to rising inflation expectations (E52) | decrease in actual inflation (E31) |
| narrow focus on inflation stabilization (E63) | welfare-reducing boom-bust cycles (E32) |
| policies that do not account for credit growth (E61) | exacerbate economic volatility (F69) |
| monetary tightening in response to strong credit growth (E51) | mitigate negative consequences of boom-bust cycles (E32) |