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Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory

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  • Marc Lavoie

Abstract

The subprime financial crisis has forced several North American and European central banks to take extraordinary measures and to modify some of their operational procedures. These changes have made even clearer the deficiencies and lack of realism in mainstream monetary theory, as can be found in both undergraduate textbooks and most macroeconomic models. They have also forced monetary authorities to reject publicly some of the assumptions and key features of mainstream monetary theory, fearing that, on that mistaken basis, actors in the financial markets would misrepresent and misjudge the consequences of the actions taken by the monetary authorities. These changes in operational procedures also have some implications for heterodox monetary theory; in particular, for post-Keynesian theory. The objective of this paper is to analyze the implications of these changes in operational procedures for our understanding of monetary theory. The evolution of the operating procedures of the Federal Reserve since August 2007 is taken as an exemplar. The American case is particularly interesting, both because it was at the center of the financial crisis and because the U.S. monetary system and its federal funds rate market are the main sources of theorizing in monetary economics.

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  • Marc Lavoie, 2010. "Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory," Economics Working Paper Archive wp_606, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_606
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    Cited by:

    1. Guillermo Gigliani, 2014. "The Reform of the Federal Reserve in 2008: Is the Money Supply Endogenous or Exogenous?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 73-94.
    2. Vitor Eduardo SCHINCARIOL, 2016. "The United States Economy During The First Obama Administration (2009-2012)," Revista Galega de Economía, University of Santiago de Compostela. Faculty of Economics and Business., pages 171-182.
    3. Paul D. Mueller & Joshua Wojnilower, 2016. "The Federal Reserve's Floor System: Immediate Gain for Remote Pain?," Journal of Private Enterprise, The Association of Private Enterprise Education, pages 15-40.
    4. Grossmann-Wirth, V. & Vari, M., 2016. "Sortie de taux bas en situation d’excédent de liquidité : l’expérience de la Réserve fédérale américaine," Bulletin de la Banque de France, Banque de France, issue 206, pages 41-50.
    5. Dawid Johannes van Lill, 2017. "Changes in the Liquidity Effect Over Time: Evidence from Four Monetary Policy Regimes," Working Papers 704, Economic Research Southern Africa.
    6. Brett Fiebiger, 2014. "‘The Chicago Plan revisited’: a friendly critique," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(3), pages 227-249, December.
    7. Strachman, Eduardo & Fucidji, José Ricardo, 2010. "The Current Financial and Economic Crisis: Empirical and Methodological Issues," MPRA Paper 27130, University Library of Munich, Germany.
    8. Alfonso Palacio-Vera, 2011. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate," Economics Working Paper Archive wp_685, Levy Economics Institute.
    9. Scott T. Fullwiler, 2013. "An endogenous money perspective on the post-crisis monetary policy debate," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(2), pages 171-194, January.

    More about this item

    Keywords

    Federal Funds Rate; Corridor System; Interest on Bank Reserves; Money Multiplier;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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