A primer on unconventional monetary policy
Due to the severity of the financial market crisis most central banks reached the limits of their traditional monetary policy instruments and relied to a very large extent on instruments of unconventional monetary policy. In our paper we develop a simple theoretical framework for the money supply process which is able to analyze the need for such measures as well as their implications for the banking system. The paper starts with a presentation of a price-theoretic model for the money supply under "normal conditions". It then shows how the different shocks of the financial market crisis have affected the market for bank loans and how a central can compensate such shocks. The need for unconventional measures derives from the size of these shocks and the zero lower bound of the central bank's policy rate. Under such conditions the central bank can only stabilize the loan market by providing direct loans to the non-bank sector. A by-product of this approach is a net creditor position of the banking system vis-à-vis the central bank which can lead to high excess reserves and a "decoupling" of the policy rate and the level of reserves. The paper also discusses the impact of bank losses and the role of maturity transformation on the banks' loan supply.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Mar 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard G. Anderson, 2008. "Paying interest on deposits at Federal Reserve banks," Economic Synopses, Federal Reserve Bank of St. Louis.
- Todd Keister & James J. McAndrews, 2009.
"Why are banks holding so many excess reserves?,"
Current Issues in Economics and Finance,
Federal Reserve Bank of New York, vol. 15(Dec).
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7755. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.