“Cheap Money” Policy Negligibly Speeds Up Real Output Growth But Can Significantly Accelerate Inflation – Open Research Seminar

On 18 February 2019, the National Bank of Ukraine (NBU) jointly with Kyiv School of Economics hosted an open research seminar in which Mr. Michael Dobrew, a PhD candidate in the Department of Economics at Princeton University, presented his research paper (Dis-) Aggregate Consumption and Monetary Policy.

This paper studies the implications of consumer choice from goods with various degrees of price flexibility for the conduct of monetary policy. The author shows that when household income increases because of wage growth (intensive margin), households consume more sticky-price goods, i.e. durables and luxuries. At the same time, when household income growth is driven by employment (extensive margin), households show opposite behavior and disproportionately increase expenditures on flexible-price goods, most of which are necessities.

Using multi-sector New Keynesian model that captures intensive and extensive margin consumption, the author analyzes the effectiveness of monetary policy over the business cycle. Mr. Dobrew concludes that in times of high unemployment, expansionary monetary policy leads to employment growth. This creates additional market demand for necessities, which results in higher inflation with a negligible additional effect on real output.

The NBU invites researchers to participate in the NBU’s research seminars to present their findings on issues related to the NBU’s activities and the operation of the financial system. Email your proposals (along with a desired seminar date, presentation materials, an executive summary, and/or draft contributions) to the NBU Research Division of the Monetary Policy and Economic Analysis Department (email: [email protected]).

The materials of previous open research seminars are available here.