IDEAS home Printed from https://ideas.repec.org/p/sza/wpaper/wpapers117.html
   My bibliography  Save this paper

Implications of the financial crisis for models in monetary policy

Author

Listed:
  • Stan du Plessis

    () (Department of Economics, University of Stellenbosch)

Abstract

Monetary authorities have been implicated in the financial crisis of 2007-2008. John Muellbauer, for example, has blamed what he thought was initially inadequate policy responses by central banks to the crisis on their models, which are, in his words, “overdue for the scrap heap”. This paper investigates the role of monetary policy models in the crisis and finds that (i) it is likely that monetary policy contributed to the financial crisis and (ii) that an inappropriately narrow suite of models made this mistake easier. The core models currently used at prominent central banks were not designed to discover emergent financial fragility. In that respect John Muellbauer is right. But the implications drawn here are less dramatic than his: while the representative agent approach to microfoundations now seems indefensible, other aspects of modern macroeconomics are not similarly suspect. The case made here is rather for expanding the suite of models used in the regular deliberations of monetary authorities, with new models that give explicit roles to the financial sector, to money and to the process of exchange. Recommending a suite of models for policy making entails no methodological innovation. That is what central banks do; though, of course, how they do it is open to improvement. The methodological innovation is the inclusion of a model that would be sensitive to financial fragility, a sensitivity that was absent in the run-up to the current financial crisis.

Suggested Citation

  • Stan du Plessis, 2010. "Implications of the financial crisis for models in monetary policy," Working Papers 18/2010, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers117
    as

    Download full text from publisher

    File URL: https://www.ekon.sun.ac.za/wpapers/2010/wp182010/wp-18-2010.pdf
    File Function: First version, 2010
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stan du Plessis & Malan Rietveld, 2013. "Should inflation targeting be abandoned in favour of nominal income targeting?," Working Papers 12/2013, Stellenbosch University, Department of Economics.
    2. Piet-Hein Van Eeghen, 2011. "Rethinking equilibrium conditions in macromonetary theory: A conceptually rigorous approach," Working Papers 255, Economic Research Southern Africa.

    More about this item

    Keywords

    Monetary policy; financial crisis; methodology of policy models;

    JEL classification:

    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sza:wpaper:wpapers117. 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: (Melt van Schoor). General contact details of provider: http://edirc.repec.org/data/desunza.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.