The effect of economic shocks under different monetary policy procedures and different economic structures

This dissertation tries to contribute to the analysis of short run monetary policy, assuming it is used to attain a target level of income. To this effect the concept of Instrument-Indicators is introduced, representing monetary variables that are used as the link between the monetary sector and the income target, and that therefore serve to define a specific type of short run monetary policy. Each policy is defined according to a specific monetary variable that is used as the instrument to attain the final target. The purpose then is to analyze the effect of real and monetary sector shocks on income under each of the different policies, since these shocks may limit the ability of monetary policy to attain the desired income target. To do this an initial theoretical framework is specified, and then a set of different assumptions is introduced yielding a set of different frameworks (models) under which our monetary policy analysis is performed. These frameworks or models are of two types: aggregated and disaggregated. For both types, the model's specification is summarized in the respective IS and LM equations. However, the monetary sector of the aggregated models does not disclose the elements that determine money supply, while the disaggregated models are characterized by a monetary sector that explicitely shows the sources and uses of the monetary base. For the former type of models we analyze the money supply and the interest rate policies, under economic structures that have the following unique characteristics: interest inelastic investment, interest elastic money supply, investment as a function of real expected interest rate and wealth effect in consumption. For the latter we study the security portfolio, unborrowed reserves, monetary base and interest rate policies, under economic structures that have the following salient features: interest inelastic demand for money, iinterest elastic borrowings and excess reserves functions and iinterest bearing demand deposits. Then for each model, and each alternative monetary policy, the effect of each type of shock on income is obtained in the respective reduced form equation. The consequences for the monetary variables that are not being used as instruments are also analyzed. The outcome of the analysis leads us to conclude that the superiority of a specific type of policy is determined not only by the type of instabilities or shocks that are more commonly present in the economy under study, but also by its structural characteristics. Therefore, an accurate specification of these characteristics is of greatest importance if monetary policy is to be successful. Furthermore, the need to revise the "rules" that have been established within a specific policy, as well as the framework behind such rules, arises whenever economic behavior is affected by current economic outcomes.