Sunday, June 12, 2011

Monetary policy effects may be stronger

On the contribution of monetary policy to economic fluctuations by Olivier Coibion adds to our understanding of monetary policy and its complexity. His work is very simple, take out the Volcker period and see what is the sensitivity of economic fluctuations to monetary policy. He finds the result that monetary policy has bigger impact than expected over the entire period. Previous work by many researchers finds monetary policy effects are limited. There also s a group that finds versus significant effects.

Hence, if you want to have an impact on the economy the size of the stimulus will have to be based on the potential sensitivity. A higher sensitivity will mean a greater impact for any dollar used. Given this information, we should see more real effects from monetary effects. In reality, the sensitivity has been less than expected. The current environment does not fit past behavior; consequently, we have to plan for a different world.

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