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Economies 2013, 1(3), 49-64; doi:10.3390/economies1030049
Article

The Changing Effectiveness of Monetary Policy

Received: 15 August 2013; in revised form: 29 October 2013 / Accepted: 30 October 2013 / Published: 13 November 2013
(This article belongs to the Special Issue Effects of Fiscal and Monetary Policy in the Great Recession)
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Abstract: In the wake of the 2008 financial crisis, many countries are hoping that massive increases in their money supplies will revive their economies. Evaluating the effectiveness of this strategy using traditional statistical methods would require the construction of an extremely complex economic model of the world that showed how each country’s situation affected all other countries. No matter how complex that model was, it would always be subject to the criticism that it had omitted important variables. Omitting important variables from traditional statistical methods ruins all estimates and statistics. This paper uses a relatively new statistical method that solves the omitted variables problem. This technique produces a separate slope estimate for each observation which makes it possible to see how the estimated relationship has changed over time due to omitted variables. I find that the effectiveness of monetary policy has fallen between the first quarter of 2003 and the fourth quarter of 2012 by 14%, 36%, 38%, 32%, 29% and 69% for Japan, the UK, the USA, the Euro area, Brazil, and the Russian Federation respectively. I hypothesize that monetary policy is suffering from diminishing returns because it cannot address the fundamental problem with the world’s economy today; that problem is a global glut of savings that is either sitting idle or funding speculative bubbles.
Keywords: monetary policy; gross domestic product; inflation; glut of savings monetary policy; gross domestic product; inflation; glut of savings
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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MDPI and ACS Style

Leightner, J.E. The Changing Effectiveness of Monetary Policy. Economies 2013, 1, 49-64.

AMA Style

Leightner JE. The Changing Effectiveness of Monetary Policy. Economies. 2013; 1(3):49-64.

Chicago/Turabian Style

Leightner, Jonathan E. 2013. "The Changing Effectiveness of Monetary Policy." Economies 1, no. 3: 49-64.

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