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New Instruments of Monetary Policy

Author

Listed:
  • Jagjit S. Chadha
  • Sean Holly

Abstract

We assess recent developments in monetary policy practice following the financial crisis drawing on papers from a specially convened conference in March 2010. In particular, we consider why central banks throughout the world have injected substantial quantities of liquidity into the financial system and seen their balance sheets expand to multiples of GDP. We outline the rationale for balance sheet operations: (i) portfolio balance of the non-bank financial sector; (ii) an offset for the zero bound; (iii) signalling mechanism about medium term inflation expectations and (iv) the alleviation of the government's budget constraint. We briefly outline the recent experience with QE and draw a distinction between liquidity and macroeconomic stabilisation operations.

Suggested Citation

  • Jagjit S. Chadha & Sean Holly, 2011. "New Instruments of Monetary Policy," Studies in Economics 1109, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:1109
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    File URL: https://www.kent.ac.uk/economics/repec/1109.pdf
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    References listed on IDEAS

    as
    1. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 825-860.
    2. Mr. Carlo Cottarelli & José Vinãls, 2009. "A Strategy for Renormalizing Fiscal and Monetary Policies in Advanced Economies," IMF Staff Position Notes 2009/022, International Monetary Fund.
    3. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    4. Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
    5. Carlo Cottarelli & José Vinãls, 2009. "A Strategy for Renormalizing Fiscal and Monetary Policies in Advanced Economies," IMF Staff Position Notes 2009/22, International Monetary Fund.
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    Cited by:

    1. Daniel L. Thornton, 2012. "The Federal Reserve’s response to the financial crisis: what it did and what it should have done," Working Papers 2012-050, Federal Reserve Bank of St. Louis.
    2. Philip Turner, 2011. "Is the long-term interest rate a policy victim, a policy variable or a policy lodestar?," BIS Working Papers 367, Bank for International Settlements.

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    More about this item

    Keywords

    zero bound; open-market operations; quantitative easing; monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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