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Heterodox Central Banking

In: Monetary Policy under Financial Turbulence


  • Luis Felipe Céspedes

    (Banco Central de Chile)

  • Roberto Chang

    (Rutgers University)

  • Javier García-Cicco

    (Banco Central de Chile)


This paper discusses theoretical and practical aspects of the various unconventional central bank policies during the 2008-2009 crisis. In terms of theory, we first discuss the role of credibility in the attainment of inflationary goals once the nominal interest rate is at a lower bound, paying particular attention to the role of the central bank’s balance sheet. Additionally, we present a model which has at its core a financial imperfection that highlights the role of bank’s capital as well as the relevance of alternative credit policies that can be used to deal with financial distress. On the other hand, we review evidence regarding the recent experience. We discuss the timing and type of observed unconventional policies. We then explore alternative measures to assess the stance of monetary policy in a situation when the policy rate has reached its lower bound. Finally, we present some descriptive evidence on the effect of the applied policies on the shape of the yield curve and the lending-deposit spread.
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Suggested Citation

  • Luis Felipe Céspedes & Roberto Chang & Javier García-Cicco, 2011. "Heterodox Central Banking," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 8, pages 219-281 Central Bank of Chile.
  • Handle: RePEc:chb:bcchsb:v16c08pp219-281

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    References listed on IDEAS

    1. Olivier Jeanne & Lars E. O. Svensson, 2007. "Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank," American Economic Review, American Economic Association, vol. 97(1), pages 474-490, March.
    2. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, January.
    3. Glenn D. Rudebusch, 2009. "The Fed's monetary policy response to the current crisis," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may22.
    4. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    5. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Two Reasons Why Money and Credit May be Useful in Monetary Policy," NBER Working Papers 13502, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Luis F. Céspedes & Javier García-Cicco & Diego Saravia, 2014. "Monetary Policy at the Zero Lower Bound: The Chilean Experience," Central Banking, Analysis, and Economic Policies Book Series,in: Sofía Bauducco & Lawrence Christiano & Claudio Raddatz (ed.), Macroeconomic and Financial Stability: challenges for Monetary Policy, edition 1, volume 19, chapter 13, pages 427-460 Central Bank of Chile.
    2. Damián Romero & Luis Ceballos, 2014. "The Yield Curve Information Under Unconventional Monetary Policies," Working Papers Central Bank of Chile 732, Central Bank of Chile.

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