Journal article


M Dong, SX Xiao

International Economic Review | Wiley | Published : 2019


We discover a consumption channel of monetary policy in a model with money and government bonds. When the central bank withdraws government bonds (short-term or long-term) through open market operations, it lowers returns on bonds. The lower return has a direct negative impact on consumption by households that hold bonds and an indirect negative impact on consumption by households that hold money. As a result, firms earn less profits from production, which leads to higher unemployment. The existence of such a consumption channel can help us understand the effects of unconventional monetary policy.

University of Melbourne Researchers


Awarded by Australian Research Council's DECRA scheme

Funding Acknowledgements

We thank Guido Menzio and three referees for insightful comments. We also thank Chris Edmond, Pedro Gomis-Porqueras, Susumu Imai, Benoit Julien, Chao Gu, Tim Kam, Gordon Menzies, Guillaume Rocheteau, Jeff Sheen, Chi Chung Siu, John Wooders, Stephen Willamson, Randall Wright, Yajun Xiao, and seminar participants at Deakin, Monash, RMIT, Tsinghua, Adelaide, Melbourne, UNSW, Queensland, UTS, UW-Madison, St. Louis Fed, the 26th Australian PhD Conference in Economics and Business, Sydney Macro Reading Group, and the 2014 Chicago Fed Summer Workshop on Money, Banking, Payments, and Finance for helpful comments. Dong acknowledges financial support under Australian Research Council's DECRA scheme (project number DE120102589). Xiao acknowledges the hospitality and support when visiting UW-Madison, St. Louis Fed, and Melbourne, and the funding support from Dan Searle Fellowship for her postdoc at UW-Madison.