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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.