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Heterodox Central Banking

  • Luis Felipe Céspedes
  • Roberto Chang
  • Javier García-Cicco

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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 586.

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Date of creation: Jul 2010
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Handle: RePEc:chb:bcchwp:586
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  1. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, June.
  2. Jeanne, Olivier & Svensson, Lars E O, 2004. "Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank," CEPR Discussion Papers 4599, C.E.P.R. Discussion Papers.
  3. 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.
  4. 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.
  5. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
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