Working Paper: NBER ID: w22837
Authors: Joseph E. Stiglitz
Abstract: In the aftermath of the Great Recession, there is a growing consensus, even among central bank officials, concerning the limitations of monetary policy. This paper provides an explanation for the ineffectiveness of monetary policy, and in doing so provides a new framework for thinking about monetary policy and macro-economic activity. What matters is not so much the money supply or the T-bill interest rate, but the availability of credit, and the terms at which credit is made available. The latter variables may not move in tandem with the former. In particular, the spread between the T bill rate and the lending rate may increase, so even as the T bill rate decreases, the lending rate increases. An increase in credit availability may not lead to more spending on produced goods, but increased prices for land or other fixed assets; it can go to increased margins associated with increases in speculative activity; or it may go to spending abroad rather than at home. The paper explains the inadequacy of theories based on the zero low bound, and argues that the ineffectiveness of monetary policy is more related to the multiple alternative uses—beyond the purchase of domestically produced goods—of additional liquidity and to its adverse distributional consequences. The paper shows that while monetary policy is less effective than has been widely presumed, it is also more distortionary, identifying several distinct distortions.
Keywords: monetary policy; credit availability; macroeconomic stability; financial markets; Great Recession
JEL Codes: E42; E44; E51; G01; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Availability of credit (G21) | Economic activity (E29) |
| Monetary policy (E52) | Income distribution (D31) |
| Income distribution (D31) | Aggregate demand (E00) |
| Monetary policy (E52) | Economic activity (E29) |
| Credit availability (G21) | Spending on produced goods (E20) |
| Supply of money (E51) | Demand for produced goods (E23) |