How effective is the monetary policy?

Abstract

Purpose

The purpose of this paper is to provide logical and empirical explanations as to why monetary policy is ineffective with respect to affecting mortgage rates, and thus investment and aggregate demand.

Design/methodology/approach

Logical and empirical evidence is provided in support of the hypothesis that changes in the money supply have no significant impact on interest rates in general, and particularly on mortgage rates. This empirical analysis is based on a simple regression of changes in mortgage rates on changes in the money supply, and covers the 1990‐2004 period.

Findings

Support was found for our hypothesis that changes in money supply have no significant impact on interest rates.

Research limitations/implications

The conclusion of this paper should be incorporated in all macroeconomics textbooks. Lack of such analyses may leave a confusing or misleading impression about economic theories in the mind of economics students.

Practical implications

One should not rely on monetary policy as an effective tool of stabilization policy.

Originality/value

The message of this paper is to readers of macroeconomics textbooks. This paper has an original value in that it communicates to readers that most macroeconomic textbooks fail to provide detailed and clear explanations as to why very frequently monetary policy does not achieve its objective of stabilizing the economy.

Citation

Shokoofeh, F. (2006), "How effective is the monetary policy?", Humanomics, Vol. 22 No. 3, pp. 139-144. https://doi.org/10.1108/08288660610703311