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Monetary policy in a systemic crisis

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This paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort. It is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend upon the well functioning of the interbank market. As the crisis developed, liquidity vanished and the interbank market collapsed, central banks had to inject much more liquidity at low interest rates than predicted by standard monetary policy models. At the same time, as the interbank market did not allow for the redistribution of liquidity among banks, central banks had to design new channels for liquidity injection.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1200.

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Date of creation: Nov 2009
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Handle: RePEc:upf:upfgen:1200

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Cited by:
  1. Hiroshi Fujiki, 2010. "Policy Measures to Alleviate Foreign Currency Liquidity Shortages under Aggregate Risk with Moral Hazard," IMES Discussion Paper Series 10-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Christian Dreger & Jürgen Wolters, 2013. "Money demand and the role of monetary indicators in forecasting euro area inflation," FIW Working Paper series, FIW 119, FIW.
  3. Alistair Milne, 2009. "Macroprudential policy: what can it achieve?," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 608-629, Winter.
  4. Laurent Le Maux & Laurence Scialom, 2013. "Central banks and financial stability: rediscovering the lender-of-last-resort practice in a finance economy," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 37(1), pages 1-16.

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