Monetarism Rides Again? US Monetary Policy in a World of Quantitative Easing

49 Pages Posted: 17 Nov 2014

See all articles by Vo Phuong Mai Le

Vo Phuong Mai Le

Cardiff University - Cardiff Business School

David Meenagh

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Date Written: November 2014

Abstract

This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.

Keywords: crises, DSGE model, financial frictions, fiscal multiplier, indirect inference, monetary policy, money supply, QE, zero bound

JEL Classification: C1, E3, E44, E52

Suggested Citation

Le, Vo Phuong Mai and Meenagh, David and Minford, Patrick, Monetarism Rides Again? US Monetary Policy in a World of Quantitative Easing (November 2014). CEPR Discussion Paper No. DP10250. Available at SSRN: https://ssrn.com/abstract=2526363

Vo Phuong Mai Le (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

David Meenagh

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5198 (Phone)
+44 29 2087 4419 (Fax)

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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