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Monetary policy implementation: Misconceptions and their consequences

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  • Piti Disyatat

Abstract

Despite constituting the very heart of the monetary transmission mechanism, widespread misconceptions still exist regarding how monetary policy is implemented. This paper highlights the key misconceptions in this regard and shows how they have compromised the understanding of important aspects of the monetary transmission mechanism. In particular, the misplaced emphasis on open market operations as the means through which monetary policy is implemented can give rise to inappropriate characterizations of monetary policy, as well as to ill-defined discussions of liquidity effects, the bank lending channel, and sterilized exchange rate intervention.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 269.

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Length: 28 pages
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:bis:biswps:269

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Keywords: Monetary policy implementation; transmission mechanism; interest rates; money; liquidity effect; bank lending channel; sterilized intervention;

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  1. Immer Ärger mit der Geldmenge
    by Gerald Braunberger in Fazit on 2012-02-06 08:36:00
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Cited by:
  1. Bank for International Settlements, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, Bank for International Settlements, number 71, 8.
  2. Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive, Levy Economics Institute wp_685, Levy Economics Institute.
  3. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, Bank of England, vol. 54(1), pages 14-27.
  4. Claudio BORIO & Piti DISYATAT, 2010. "Global Imbalances and the Financial Crisis: Reassessing the Role of International Finance," Asian Economic Policy Review, Japan Center for Economic Research, Japan Center for Economic Research, vol. 5(2), pages 198-216, December.
  5. Stan du Plessis, 2012. "Assets matter: New and old views of monetary policy," Working Papers 16/2012, Stellenbosch University, Department of Economics.
  6. Benjamin M. Friedman & Kenneth N. Kuttner, 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," NBER Working Papers 16165, National Bureau of Economic Research, Inc.
  7. Peter Spahn, 2010. "Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 323/2010, Department of Economics, University of Hohenheim, Germany.
  8. Kotaro Ishi & Kenji Fujita & Mark R. Stone, 2011. "Should Unconventional Balance Sheet Policies Be Added to the Central Bank toolkit? a Review of the Experience so Far," IMF Working Papers, International Monetary Fund 11/145, International Monetary Fund.
  9. Ion PARTACHI & Simion MIJA, 2013. "Monetary Policy Transmission Mechanism Using Econometric Models," Romanian Statistical Review Supplement, Romanian Statistical Review, Romanian Statistical Review, vol. 61(4), pages 148-157, December.
  10. Cappiello, Lorenzo & Kadareja, Arjan & Kok, Christoffer & Protopapa, Marco, 2010. "Do bank loans and credit standards have an effect on output? A panel approach for the euro area," Working Paper Series, European Central Bank 1150, European Central Bank.

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