NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The effects of quasi-random monetary experiments

Òscar Jordà, Moritz Schularick, Alan M. Taylor

NBER Working Paper No. 23074
Issued in January 2017, Revised in November 2017
NBER Program(s):DAE, EFG, IFM, ME

The trilemma of international finance entails that fluctuations in interest rates—for countries with fixed exchange rates that allow unfettered cross-border capital flows—are mostly due to international arbitrage. Consequently, we can locate a valid source of exogenous variation to identify monetary policy effects with instrumental variable methods. Paired with conventional instruments based on central bank staff forecasts, and using historical data since 1870, we estimate local average treatment effects (LATE) of monetary policy interventions for different subpopulations. Using a novel control function approach we determine the robustness of our findings to possible spillovers via alternative trade-based channels. Our results reveal and rectify attenuation bias in previous estimates, are consistent with theory, and provide a good approximation to the ATE. The effects that we report are quantitatively important and state-dependent.

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Document Object Identifier (DOI): 10.3386/w23074

 
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