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Changes in Central Bank Procedures During the Subprime Crisis and Their Repercussions on Monetary Theory

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  • Marc Lavoie

Abstract

The subprime financial crisis has forced several central banks to take extraordinary measures and to modify some of their operational procedures. These changes have made the deficiencies and lack of realism of mainstream monetary theory even clearer, as can be seen in undergraduate textbooks as well as in most macroeconomic models. They have forced monetary authorities to publicly reject some of the assumptions and key features of mainstream monetary theory, fearing that, on that mistaken basis, actors in the financial markets would misrepresent and misjudge the consequences of the actions taken by the monetary authorities. These changes in operational procedures also have some implications for heterodox monetary theory, in particular for post-Keynesian theory. My objective in this article is to analyze the implications of these changes in operational procedures for an understanding of monetary theory. I take the evolution of the operating procedures of the Federal Reserve since August 2007 as an exemplar. The U.S. case is particularly interesting, both because it was at the center of the financial crisis and because the U.S. monetary system and its federal funds rate market are the main sources of theorizing in monetary economics.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal International Journal of Political Economy.

Volume (Year): 39 (2010)
Issue (Month): 3 (October)
Pages: 3-23

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Handle: RePEc:mes:ijpoec:v:39:y:2010:i:3:p:3-23

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=110909

Related research

Keywords: central bank procedures; federal funds rate; interest on bank reserves; money multiplier;

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Cited by:
  1. Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
  2. Eduardo Strachman & José Ricardo Fucidji, 2012. "The Current Financial And Economic Crisis: Empirical And Methodological Issues," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 95-123, June.

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