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Central banking in the credit turmoil: An assessment of Federal Reserve practice

  • Goodfriend, Marvin

Central banking is understood in terms of the fiscal features of monetary, credit, and interest on reserves policies. Monetary policy - expanding reserves by buying Treasuries - transfers all revenue from money creation directly to the fiscal authorities. Credit policy - selling Treasuries to fund loans or acquire non-Treasury securities - is debt-financed fiscal policy. Interest on reserves frees monetary policy to fund credit policy independently of interest rate policy. An ambiguous boundary of responsibilities between the Fed and the fiscal authorities contributed to economic collapse in fall 2008. "Accord" principles are proposed to clarify Fed credit policy powers and secure its independence on monetary and interest rate policy. The Fed needs more surplus capital from the fiscal authorities to be fully flexible against both inflation and deflation at the zero interest bound.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 1 (January)
Pages: 1-12

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Handle: RePEc:eee:moneco:v:58:y:2011:i:1:p:1-12
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Morten L. Bech & Elizabeth Klee, 2009. "The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market," Staff Reports 416, Federal Reserve Bank of New York.
  2. David Bowman & Etienne Gagnon & Mike Leahy, 2010. "Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks," International Finance Discussion Papers 996, Board of Governors of the Federal Reserve System (U.S.).
  3. Marvin Goodfriend & Jeffrey M. Lacker, 1999. "Limited commitment and central bank lending," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-27.
  4. Olivier Armantier & Sandra Krieger & James McAndrews, 2008. "The Federal Reserve's Term Auction Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jul).
  5. Jeffrey M Lacker, 2009. "Government Lending and Monetary Policy," Business Economics, Palgrave Macmillan, vol. 44(3), pages 136-142, July.
  6. Goodfriend, Marvin, 2000. "Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1007-35, November.
  7. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
  8. Charles I. Plosser, 2009. "Ensuring sound monetary policy in the aftermath of crisis: a speech at the U.S. Monetary Policy Forum, The Initiative on Global Markets, New York City, February 27, 2009," Speech 24, Federal Reserve Bank of Philadelphia.
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