Working Paper: NBER ID: w24714
Authors: Jing Cynthia Wu; Ji Zhang
Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable framework to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between countries. Empirically, we find the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
Keywords: unconventional monetary policy; effective lower bound; New Keynesian model
JEL Codes: E52; F00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative supply shock (E31) | decrease in output and terms of trade (F14) |
| negative supply shock under ELB (F41) | increase in output and terms of trade (F14) |
| negative supply shock (E31) | raises inflation (E31) |
| raises inflation (E31) | lowers real interest rates (E43) |
| asymmetric implementation of unconventional policies (E65) | varying economic impacts (F69) |
| home economy's own policy actions (E69) | benefits more compared to foreign economy (F14) |
| unconventional monetary policy (E59) | economic outcomes (F61) |
| unconventional monetary policy (E59) | anomalies in output and terms of trade (F14) |
| unconventional monetary policy (E59) | stimulates the economy (O51) |