Can central banks run out of ammunition? The role of the money-equities-interaction channel in monetary policy

Abstract

Many authorities claim that central banks ‘have run out of ammunition’, either because the central bank rate has dropped close to the zero lower bound or because of Keynes's liquidity trap. I argue first, that indefinitely large increases in the quantity of money remain possible even with the central bank rate close to zero, and, second, that increases in the quantity of money raise all asset prices, including the prices of quoted equities, not just bond prices. Bonds are an unimportant asset class in modern capitalist economies, relative to corporate equity and real estate. Meanwhile increases in equity prices always boost aggregate demand and output.