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Monetary policy in the 2008-2009 recession

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  • Robert L. Hetzel

Abstract

The recession that began with a cyclical peak in December 2007 originated in a combination of real shocks because of a fall in housing wealth and a fall in real income from an increase in energy prices. The most common explanation for the intensification of the recession that began in the late summer of 2008 is the propagation of these shocks through dysfunction in credit markets. The alternative explanation offered in this article emphasizes propagation through contractionary monetary policy. The first explanation stresses the importance of credit-market interventions (credit policy). The second emphasizes the importance of money creation (money-creation policy). According to Federal Open Market Committee (FOMC) Chairman William McChesney Martin, "The System should always be engaged in a ruthless examination of its past record" (FOMC Minutes, 11/26/68, 1,456).

Suggested Citation

  • Robert L. Hetzel, 2009. "Monetary policy in the 2008-2009 recession," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 201-233.
  • Handle: RePEc:fip:fedreq:y:2009:i:spr:p:201-233:n:v.95no.2
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    1. Robert E. Lucas, Jr., 1980. "Rules, Discretion, and the Role of the Economic Advisor," NBER Chapters,in: Rational Expectations and Economic Policy, pages 199-210 National Bureau of Economic Research, Inc.
    2. Hetzel, Robert L., 1990. "Central banks' independence in historical perspective : A review essay," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 165-176, January.
    3. John R. Walter, 2005. "Depression era bank failures : the great contagion of the great shakedown?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 39-54.
    4. Michael D. Bordo, 2008. "An Historical Perspective on the Crisis of 2007-2008," NBER Working Papers 14569, National Bureau of Economic Research, Inc.
    5. Robert L. Hetzel, 2009. "World Recession: What Went Wrong?," Economic Affairs, Wiley Blackwell, vol. 29(3), pages 17-21, September.
    6. Hetzel,Robert L., 2008. "The Monetary Policy of the Federal Reserve," Cambridge Books, Cambridge University Press, number 9780521881326, May.
    7. Robert L. Hetzel, 2006. "Making the systematic part of monetary policy transparent," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 255-290.
    8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Citations

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    Cited by:

    1. Michael D Bordo, 2012. "The Great Depression and the Great Recession: What have we Learned?," Working Papers id:4924, eSocialSciences.
    2. Belongia, Michael T. & Ireland, Peter N., 2016. "The evolution of U.S. monetary policy: 2000–2007," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 78-93.
    3. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.
    4. repec:eee:jmacro:v:54:y:2017:i:pa:p:90-99 is not listed on IDEAS
    5. WARBURTON, Christopher E.S., 2013. "When Markets Fail: Asset Prices, Government Expenditures, and the Velocity of Money," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(2), pages 73-92.
    6. Michael D. Bordo & John S. Landon-Lane, 2012. "The Global Financial Crisis: Is It Unprecedented?," Chapters,in: Global Economic Crisis, chapter 2 Edward Elgar Publishing.
    7. Bernard LANDAIS, 2010. "The Monetary Origins Of The Economic And Financial Crisis," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(3(13)/Fal), pages 280-291.
    8. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
    9. Levrero, Enrico Sergio & Deleidi, Matteo, 2017. "The money creation process: A theoretical and empirical analysis for the US," MPRA Paper 81970, University Library of Munich, Germany.

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    Keywords

    Monetary policy ; Credit;

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