Changes in Central Bank Procedures During the Subprime Crisis and Their Repercussions on Monetary Theory
AbstractThe 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 InfoArticle provided by M.E. Sharpe, Inc. in its journal International Journal of Political Economy.
Volume (Year): 39 (2010)
Issue (Month): 3 (October)
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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=110909
central bank procedures; federal funds rate; interest on bank reserves; money multiplier;
Other versions of this item:
- Marc Lavoie, 2010. "Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory," Economics Working Paper Archive wp_606, Levy Economics Institute.
- 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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- Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
- Eduardo Strachman & José Ricardo Fucidji, 2012.
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- Strachman, Eduardo & Fucidji, José Ricardo, 2010. "The Current Financial and Economic Crisis: Empirical and Methodological Issues," MPRA Paper 27130, University Library of Munich, Germany.
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