Open Market Operations as a Monetary Policy Shock Measure in a Quantitative Business Cycle Model

34 Pages Posted: 8 Mar 2001

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Date Written: December 2000

Abstract

This paper presents a business cycle analysis of monetary policy shocks measured by disturbances to open market operations, i.e. the ratio of open market papers to non-borrowed reserves. We find empirical evidence for the usefulness of this policy measure, as it predicts significant declines in output, M1 growth, and prices, as well as a significant rise in interest rates after a monetary contraction. We develop a dynamic general equilibrium model with financial intermediation where monetary policy is conducted via open market operations. In accordance with our empirical findings, a monetary tightening leads to a fall in output, monetary aggregates, and factor prices. In contrast to an alternative model specification with money growth shocks, our model with disturbances to open market operations also generates a persistent rise of nominal and real interest rates on securities in response to a monetary contraction. Furthermore, the introduction of staggered prices is demonstrated to improve the model's ability to replicate second moments of empirical time series.

Keywords: Monetary Policy, Financial Intermediation, Open Market Operations, Business Cycles, Price Stickiness

JEL Classification: E30, E50, E52

Suggested Citation

Heer, Burkhard and Schabert, Andreas, Open Market Operations as a Monetary Policy Shock Measure in a Quantitative Business Cycle Model (December 2000). CESifo Working Paper Series No. 396. Available at SSRN: https://ssrn.com/abstract=260917

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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