LIQUIDITY, MONETARY POLICY, AND UNEMPLOYMENT: A NEW MONETARIST APPROACH | Zendy

Dong Mei | Zendy; Xiao Sylvia Xiaolin | Zendy

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LIQUIDITY, MONETARY POLICY, AND UNEMPLOYMENT: A NEW MONETARIST APPROACH

Author(s) -

Dong Mei,

Xiao Sylvia Xiaolin

Publication year - 2019

Publication title -

international economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 2.658

H-Index - 86

eISSN - 1468-2354

pISSN - 0020-6598

DOI - 10.1111/iere.12374

Subject(s) - economics , monetarism , consumption (sociology) , market liquidity , monetary policy , monetary economics , unemployment , bond , government (linguistics) , macroeconomics , finance , social science , linguistics , philosophy , sociology

We discover a consumption channel of monetary policy in a model with money and government bonds. When the central bank withdraws government bonds (short‐term or long‐term) through open market operations, it lowers returns on bonds. The lower return has a direct negative impact on consumption by households that hold bonds and an indirect negative impact on consumption by households that hold money. As a result, firms earn less profits from production, which leads to higher unemployment. The existence of such a consumption channel can help us understand the effects of unconventional monetary policy.

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