The Folk Theorem of Decreasing Effectiveness of Monetary Policy: What Do the Data Say?

Ugo Panizza, The Graduate Institute, Geneva and CEPR
Charles Wyplosz, The Graduate Institute, Geneva and CEPR

Citation: Panizza, U., Wyplosz, C. (2018). The Folk Theorem of Decreasing Effectiveness of Monetary Policy: What Do the Data Say? Russian Journal of Money and Finance, 77(1), pp. 71-107.

Abstract

It is increasingly claimed that unconventional monetary policies are subject to decreasing effectiveness in supporting growth and raising the inflation rate. There are good reasons to believe that the effects of further asset purchases by central banks and of moving the interest rate deeper in negative territory progressively decline. But has it been happening? This paper attempts to provide an answer. Looking at the Eurozone, the UK, the US and Japan, it uses different approaches (local projection and Bayesian VAR) on different sub-samples. The evidence is mixed. Policy interventions proxied by the shadow policy rate seem to be subject to the decreasing effectiveness hypothesis. However, this is not the case for QE announcements.

Keywords: unconventional monetary policy, zero lower bound, shadow policy rate
JEL: E52, E58

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