Can central banks run out of ammunition? The role of the money‐equities‐interaction channel in monetary policy

Abstract

Many authorities claim that central banks ‘have run out of ammunition’, either because the central bank rate has dropped close to the zero lower bound or because of Keynes's liquidity trap. I argue first, that indefinitely large increases in the quantity of money remain possible even with the central bank rate close to zero, and, second, that increases in the quantity of money raise all asset prices, including the prices of quoted equities, not just bond prices. Bonds are an unimportant asset class in modern capitalist economies, relative to corporate equity and real estate. Meanwhile increases in equity prices always boost aggregate demand and output.

Interest rates or quantity of money? Edward Nelson on Milton Friedman

“…In February 1936, in an unpublished letter to The Times, he wrote, "…if the creation of credit [and money] has no effect on the rate of interest, it will have no effect on prices". 7 The reviewer emphasised the point in his article in the February 2021 issue of this journal (Congdon, 2021; see particularly pages 25-7). 8 The discussion of money and interest rates in Samuelson (1948, pp.…”

“…7 7 The reviewer emphasised the point in his article in the February 2021 issue of this journal (Congdon, 2021; see particularly pages 25–7).…”

“…9 9 The reviewer noted the affinities between the portfolio rebalancing literature and Friedman and Schwartz's 1963 ‘tentative sketch’ in Congdon (2021, pp. 30–1).…”

The Interconnectedness of Stock Prices, Money, and Credit Across Time and Frequency From 1970 to 2016

“…The harmful effects of financial instability and unsustainable developments in the stock market on the real economy have emphasised the importance of asset prices in policy deliberations in recent years (Congdon, 2021;Caines & Winkler, 2021;Reinhart & Rogoff, 2009). Instability is often the result of asset price volatility accompanied by rapid changes in liquidity conditions (Bordo & Haubrich, 2010;Borio & Lowe, 2002).…”