Monetarism rides again? US monetary policy in a world of Quantitative Easing

- In a model of banking we give money a role in providing cheap collateral.
- Monetary policy is still effective at the zero bound.
- A simple rule for making M0 respond to credit conditions stabilises the economy.
- Combination this with Price-level or GDP targeting, stabilises the economy further.
- Aggressive and distortionary regulation of banks' balance sheets is redundant.

In a model of banking we give money a role in providing cheap collateral; i.e. besides the Taylor Rule, monetary policy can affect the risk-premium by varying the supply of M0 in open market operations, so that even at the zero bound monetary policy is still effective, and fiscal policy still crowds out investment. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. This, in combination with Price-level or nominal GDP targeting rules for interest rates, stabilises the economy further, making aggressive and distortionary regulation of banks' balance sheets redundant.