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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.

Suggested Citation

  • Marc Lavoie, 2010. "Changes in Central Bank Procedures During the Subprime Crisis and Their Repercussions on Monetary Theory," International Journal of Political Economy, Taylor & Francis Journals, vol. 39(3), pages 3-23.
    • Handle: RePEc:mes:ijpoec:v:39:y:2010:i:3:p:3-23
    DOI: 10.2753/IJP0891-1916390301
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    1. Scott T. Fullwiler, 2009. "The Social Fabric Matrix Approach to Central Bank Operations: An Application to the Federal Reserve and the Recent Financial Crisis," Springer Books, in: Tara Natarajan & Wolfram Elsner & Scott Fullwiler (ed.), Institutional Analysis and Praxis, pages 123-169, Springer.
    2. Tara Natarajan & Wolfram Elsner & Scott Fullwiler (ed.), 2009. "Institutional Analysis and Praxis," Springer Books, Springer, number 978-0-387-88741-8, November.
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    Cited by:

    1. Brett Fiebiger, 2016. "Fiscal Policy, Monetary Policy and the Mechanics of Modern Clearing and Settlement Systems," Review of Political Economy, Taylor & Francis Journals, vol. 28(4), pages 590-608, October.
    2. Vitor Eduardo SCHINCARIOL, 2016. "The United States Economy During The First Obama Administration (2009-2012)," Revista Galega de Economía, University of Santiago de Compostela. Faculty of Economics and Business., vol. 25(1), pages 171-182.
    3. Domenica Tropeano, 2018. "Negative interest rates on deposit facility in the Eurozone: a failed attempt to revive the unsecured interbank market," Working Papers 83-2018, Macerata University, Department of Finance and Economic Sciences, revised Apr 2018.
    4. Strachman, Eduardo, 2016. "Notas sobre Mecanismos de Transmissão da Política Monetária [Some Notes on the Monetary Policy Transmission Mechanisms]," MPRA Paper 72856, University Library of Munich, Germany.
    5. Jussi Ahokas, 2012. "Geographies of Monetary Economy and the European economic crisis," ERSA conference papers ersa12p437, European Regional Science Association.
    6. Grossmann-Wirth, V. & Vari, M., 2016. "Sortie de taux bas en situation d’excédent de liquidité : l’expérience de la Réserve fédérale américaine," Bulletin de la Banque de France, Banque de France, issue 206, pages 41-50.
    7. Dawid J. van Lill, 2017. "Changes in the Liquidity Effect Over Time: Evidence from Four Monetary Policy Regimes," Working Papers 704, Economic Research Southern Africa.
    8. Brett Fiebiger, 2014. "‘The Chicago Plan revisited’: a friendly critique," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(3), pages 227-249, December.
    9. Scott T. Fullwiler, 2013. "An endogenous money perspective on the post-crisis monetary policy debate," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(2), pages 171-194, January.
    10. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    11. Marc Lavoie & Severin Reissl, 2019. "Further insights on endogenous money and the liquidity preference theory of interest," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(4), pages 503-526, October.
    12. Paul D. Mueller & Joshua Wojnilower, 2016. "The Federal Reserve's Floor System: Immediate Gain for Remote Pain?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 31(Summer 20), pages 15-40.
    13. Eduardo Strachman & Jos Ricardo Fucidji, 2012. "The Current Financial And Economic Crisis Empirical And Methodological Issues," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 3(1), pages 95-109.
    14. Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
    15. Ábel, István & Losoncz, Miklós, 2022. "A pénzelmélet megújulása válságok idején [The renewal of monetary theory in times of crisis]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 451-479.

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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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