Why has US monetary policy become ineffective lately?

ABSTRACT

Some recent studies show that US monetary policy has lost its stimulative traction, especially since the early 1980s. They argue that the Fed’s forward guidance has enabled economic agents to anticipate the changes in interest rates more accurately. As a result, it is harder to find truly exogenous monetary policy shocks, which has made monetary policy ineffective. In this article, we find that anomalous economic behaviours of financial institutions might be the true reason for the ineffective monetary policy. Our structural vector autoregressive model shows that increases in the US money supply mostly flowed into the financial sector to increase its profits instead of stimulating the real sector of the economy through business investment.

KEYWORDS:

• Federal funds rate
• the Federal Open Market Operation (FOMO) borrowing
• behaviours of financial institutions

JEL CLASSIFICATION:

• E52
• C32

Disclosure statement

No potential conflict of interest was reported by the authors.