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A primer on unconventional monetary policy

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  • Bofinger, Peter
  • Debes, Sebastian

Abstract

Due to the severity of the financial market crisis most central banks reached the limits of their traditional monetary policy instruments and relied to a very large extent on instruments of unconventional monetary policy. In our paper we develop a simple theoretical framework for the money supply process which is able to analyze the need for such measures as well as their implications for the banking system. The paper starts with a presentation of a price-theoretic model for the money supply under "normal conditions". It then shows how the different shocks of the financial market crisis have affected the market for bank loans and how a central can compensate such shocks. The need for unconventional measures derives from the size of these shocks and the zero lower bound of the central bank's policy rate. Under such conditions the central bank can only stabilize the loan market by providing direct loans to the non-bank sector. A by-product of this approach is a net creditor position of the banking system vis-à-vis the central bank which can lead to high excess reserves and a "decoupling" of the policy rate and the level of reserves. The paper also discusses the impact of bank losses and the role of maturity transformation on the banks' loan supply.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7755.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7755

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Related research

Keywords: bank regulation; maturity transformation; money multiplier; money supply process; unconventional monetary policy;

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References

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  1. Todd Keister & James McAndrews, 2009. "Why are banks holding so many excess reserves?," Staff Reports 380, Federal Reserve Bank of New York.
  2. Richard G. Anderson, 2008. "Paying interest on deposits at Federal Reserve banks," Economic Synopses, Federal Reserve Bank of St. Louis.
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Cited by:
  1. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2011. "Animal spirits and credit spreads in a model with a cost channel," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48688, Verein für Socialpolitik / German Economic Association.

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