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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 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 Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_606.

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Date of creation: Aug 2010
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Handle: RePEc:lev:wrkpap:wp_606

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Web page: http://www.levyinstitute.org

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Keywords: Federal Funds Rate; Corridor System; Interest on Bank Reserves; Money Multiplier;

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Cited by:
  1. Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
  2. 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.

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