Dr. Jay Ryu
Dr. Chulho Jung
The Economics Seminar series presents Dr. Jay Ryu and Dr. Chulho Jung discussing “Exploring a Missing Link in Estimating the Effect of U. S. Monetary Policy” on Friday, Nov. 16, at 3 p.m. in Bentley Annex 302.
Ryu is Professor of Political Science at Ohio University; Jung is Professor of Economics.
Abstract: In this paper, we show that contractionary U.S. monetary policy has decreased both business investment and GDP for the period of 1959 through 1998 as standard macroeconomic theories predict. However, contractionary U.S. monetary policy has ironically increased both business investment and GDP for the period of 2000 through 2014 or conversely, expansionary monetary policy dampened both business investment and GDP. We define this observation as the investment puzzle. Some researchers have attempted to solve the investment puzzle with refined methodologies, but we analyze the investment puzzle from a different angle. Our results show that after 1999 increased federal credits do not flow into the real business sector and that they have no effect on the real-sector economy or even have a negative effect. We argue that U.S. financial institutions use increased federal credits to invest in financial derivative assets instead of lending the money to business firms to invest in the real-sector economy. As a result of the missing or negative link between credit flows and business investment, expansionary monetary policy such as lowering federal funds rate lowers business investment or contractionary monetary policy stimulates business investment.
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