The Specific Impact of Monetary Policy on Macroeconomic Fluctuations

Abstract

The stability of monetary policy is crucial for overall economic stability, as both excessive tightening and excessive easing may lead to increased economic fluctuations and financial risks. This paper incorporates zero-interest-rate constraints and monetary policy shocks into a general equilibrium model to discuss the specific impact of monetary policy on macroeconomic fluctuations. The study reveals that when the economy reaches the zero lower bound of interest rates, the overall instability and vulnerability of the macroeconomy significantly increase. Even minor shocks can then result in severe fluctuations. In such circumstances, corresponding monetary policies can be employed to maintain the stability of the financial system. Additionally, effective coordination between monetary policy and macroprudential policy should be emphasized to minimize the losses from adverse shocks.