Open Market Operations as a Monetary Policy Shock Measure in a Quantitative Business Cycle Model
34 Pages Posted: 8 Mar 2001
Date Written: December 2000
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: Suggested Citation