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How effective is the monetary policy?

  • Communication
  • Economics


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.

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