Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory
AbstractThe subprime financial crisis has forced several North American and European central banks to take extraordinary measures and to modify some of their operational procedures. These changes have made even clearer the deficiencies and lack of realism in mainstream monetary theory, as can be found in both undergraduate textbooks and most macroeconomic models. They have also forced monetary authorities to reject publicly 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. The objective of this paper is to analyze the implications of these changes in operational procedures for our understanding of monetary theory. The evolution of the operating procedures of the Federal Reserve since August 2007 is taken as an exemplar. The American 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 InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_606.
Date of creation: Aug 2010
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Federal Funds Rate; Corridor System; 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," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 39(3), pages 3-23, October.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-06 (All new papers)
- NEP-BAN-2010-08-06 (Banking)
- NEP-CBA-2010-08-06 (Central Banking)
- NEP-HPE-2010-08-06 (History & Philosophy of Economics)
- NEP-MAC-2010-08-06 (Macroeconomics)
- NEP-MON-2010-08-06 (Monetary Economics)
- NEP-PKE-2010-08-06 (Post Keynesian Economics)
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- 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.
- Strachman, Eduardo & Fucidji, José Ricardo, 2010. "The Current Financial and Economic Crisis: Empirical and Methodological Issues," MPRA Paper 27130, University Library of Munich, Germany.
- Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
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