The effects of quasi-random monetary experiments

The trilemma of international finance explains why interest rates in countries that fix their exchange rates and allow unfettered cross-border capital flows are outside the monetary authority's control. Based on this exogenous source of variation, we show that monetary interventions have large and significant effects using historical panel data since 1870. The causal effect of these interventions depends on whether: (1) the economy is above or below potential; (2) inflation is low; and (3) there is a credit boom in mortgage markets. Several novel control function adjustments account for potential spillover effects. The results have important implications for monetary policy. Published by Elsevier B.V.