Interest Rates and Price Levels: Quantifying Policy Effectiveness

This paper estimates the causal effect of interest rates on household expenditure. The effect is estimated by conducting a semi-parametric model utilizing the [Robinson (1988)] Double Residual Estimator and a linear regression model. We find that the effect of interest rates on household expenditure is negligible across all models, when compared to results from a previous time period in which nominal rates were higher. The results raise concerns regarding the effectiveness of the current monetary policy regime, and therefore we expect greater use of fiscal policy to be beneficial. The question of how the current monetary policy regime will evolve throughout the next decade remains an interesting enquiry.