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Prices and quantities in the monetary policy transmission mechanism

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Listed author(s):
  • Tobias Adrian
  • Hyun Song Shin

Abstract

Central banks have a variety of tools for implementing monetary policy, but the tool that has received the most attention in the literature has been the overnight interest rate. The financial crisis that erupted in the summer of 2007 has refocused attention on other channels of monetary policy, notably the transmission of policy through the supply of credit and overall conditions in the capital markets. In 2008, the Federal Reserve put into place various lender-of-last-resort programs under section 13(3) of the Federal Reserve Act in order to cushion the strains on financial intermediaries' balance sheets and thereby target the unusually wide spreads in a variety of credit markets. While classic monetary policy targets a price (for example, the federal funds rate), the liquidity facilities affect balance-sheet quantities. The financial crisis forcefully demonstrated that the collapse of the financial sector's balance-sheet capacity can have powerful adverse effects on the real economy. We reexamine the distinctions between prices and quantities in monetary policy transmission.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 396.

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Date of creation: 2009
Handle: RePEc:fip:fednsr:396
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Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Credit ; Liquidity (Economics);

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Find related papers by JEL classification:
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
  • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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  1. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
  2. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Financial intermediation, asset prices, and macroeconomic dynamics," Staff Reports 422, Federal Reserve Bank of New York.
  3. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
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Cited by:

  1. Gopalakrishnan, Balagopal & Mohapatra, Sanket, 2017. "Turning Over a Golden Leaf? Global Liquidity and Emerging Market Central Banks’ Demand for Gold after the Financial Crisis," IIMA Working Papers WP 2017-04-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
  2. Jakub Mateju, 2013. "Explaining the Strength and the Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model," Working Papers IES 2013/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2013.
  3. Otmar Issing, 2011. "Lessons for monetary policy: what should the consensus be?," Globalization and Monetary Policy Institute Working Paper 81, Federal Reserve Bank of Dallas.
  4. Serena Ng & Jonathan H. Wright, 2013. "Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1120-1154, December.
  5. Otmar Issing, 2012. "Central Banks - Paradise Lost," IMES Discussion Paper Series 12-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Adrian, Tobias & Liang, Nellie, 2016. "Monetary Policy, Financial Conditions, and Financial Stability," CEPR Discussion Papers 11394, C.E.P.R. Discussion Papers.
  7. Issing, Otmar, 2012. "Central banks: Paradise lost," CFS Working Paper Series 2012/06, Center for Financial Studies (CFS).
  8. Helbling, Thomas & Huidrom, Raju & Kose, M. Ayhan & Otrok, Christopher, 2011. "Do credit shocks matter? A global perspective," European Economic Review, Elsevier, vol. 55(3), pages 340-353, April.
  9. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters,in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148 National Bureau of Economic Research, Inc.
  10. Tobias Adrian & Nellie Liang, 2014. "Monetary Policy, Financial Conditions, and Financial Stability," IMES Discussion Paper Series 14-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  11. Otmar Issing, 2012. "The Mayekawa Lecture: Central Banks-Paradise Lost," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 30, pages 55-74, November.
  12. Leonardo Gambacorta & Hyun Song Shin, 2016. "Why bank capital matters for monetary policy," BIS Working Papers 558, Bank for International Settlements.
  13. Otmar Issing, 2011. "Lessons for Monetary Policy; What Should the Consensus Be?," IMF Working Papers 11/97, International Monetary Fund.
  14. Otmar Issing, 2010. "The development of monetary policy in the 20th century – some reflections," Working Paper Research 186, National Bank of Belgium.
  15. Peter Spahn, 2010. "Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 323/2010, Department of Economics, University of Hohenheim, Germany.
  16. Sarah Holton & Martina Lawless & Fergal McCann, 2014. "Firm credit in the euro area: a tale of three crises," Applied Economics, Taylor & Francis Journals, vol. 46(2), pages 190-211, January.
  17. Adrian, Tobias & Liang, J. Nellie, 2014. "Monetary policy, financial conditions, and financial stability," Staff Reports 690, Federal Reserve Bank of New York, revised 01 Jul 2016.

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