A primer on unconventional monetary policy

Peter Bofinger () and ,
Authors registered in the RePEc Author Service: Sebastian Debes

No 7755, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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-Ã -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.

Keywords: Money supply process; Money multiplier; Unconventional monetary policy; Bank regulation; Maturity transformation (search for similar items in EconPapers)
JEL-codes: E51 E58 G21 (search for similar items in EconPapers)
Date: 2010-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP7755 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7755

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP7755

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().