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Liquidity, Monetary Policy and Unemployment: A New Monetarist Approach

Author

Listed:
  • Mei Dong

    (Department of Economics, University of Melbourne)

  • Sylvia Xiaolin Xiao

    (School of Economics, Auckland University of Technology)

Abstract

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 re- turns 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, fi rms earn less pro fits from production, which leads to higher unemployment. The existence of such a consumption channel can help us understand the e¤ects of unconventional monetary policy.

Suggested Citation

  • Mei Dong & Sylvia Xiaolin Xiao, 2017. "Liquidity, Monetary Policy and Unemployment: A New Monetarist Approach," Working Papers 2017-07, Auckland University of Technology, Department of Economics.
    • Handle: RePEc:aut:wpaper:201707
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    File URL: https://www.aut.ac.nz/__data/assets/pdf_file/0004/107887/Economics-WP-2017-07.pdf
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    Citations

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    Cited by:

    1. Athanasios Geromichalos & Lucas Herrenbrueck, 2022. "The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 134-167, July.
    2. Lucas Herrenbrueck, 2019. "Interest Rates, Moneyness, and the Fisher Equation," Discussion Papers dp19-01, Department of Economics, Simon Fraser University.

    More about this item

    Keywords

    interest rate; monetary policy; consumption; unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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