Working Paper: NBER ID: w23157
Authors: Michael T. Belongia; Peter N. Ireland
Abstract: Discussions of monetary policy rules after the 2007-2009 recession highlight the potential ineffectiveness of a central bank’s actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank’s actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of the capacity to manipulate a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long-run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.
Keywords: monetary policy; zero lower bound; nominal income; monetary aggregates
JEL Codes: E31; E32; E37; E42; E51; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary Base (E50) | Nominal Income (E25) |
| Monetary Base (E50) | Price Levels (E30) |
| Monetary Supply (E51) | Economic Activity (R11) |
| Increase in Monetary Base (E50) | Increase in Nominal Income (E25) |
| Positive Nominal Income Gap (D31) | Subsequent Increases in Nominal Income (E19) |