Is Monetary Policy Effective During Financial Crises

By Frederic S. Mishkin. 2009

307 citations recorded by the source corpus.

This short paper argues that the view that monetary policy is ineffective during financial crises is not only wrong, but may promote policy inaction in the face of a severe contractionary shock. To the contrary, monetary policy is more potent during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely. The fact that monetary policy is more potent than during normal times provides a rationale for a risk-management approach to counter the contractionary effects from financial crises, in which monetary policy is far less inertial than would otherwise be typical -- not only by moving decisively through conventional or nonconventional means to reduce downside risks from the financial disruption, but also in being prepared to quickly take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b23231744ce02f2f89fa4e0532acb2ea0ddd780f

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Citations in the corpus

The global financial crisis: How similar? How different? How costly? (2010, background): “As discussed in Mishkin (2009), the quality of balance sheets of households and firms is a key element of the financial accelerator mechanism, because some of the assets of each borrower may serve as collateral to its liabilities which helps mitigate the problem of asymmetric information.”
Monetary Policy Strategy: Lessons from the Crisis (2011, unknown): “I have argued elsewhere (Mishkin, 2009c and in French et. al, 2010) that the recent financial crisis provides strong support for a systemic regulator and that central banks are the natural choice for this role.”
Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy? (2011, background): “At last, we assume that central bankers‟ response (if any) to financial stress is rather immediate (see Mishkin, 2009).”
(How) do the ECB and the Fed React to Financial Market Uncertainty? The Taylor Rule in Times of Crisis (2010, background): “But we are unable to detect a significant decrease in the Taylor rule without any “additional” variables which appears to be against the intuition of Mishkin (2008, 2009).”
Using monetary policy to stabilize economic activity (2009, background): “Mishkin 2009 is explicit in arguing that even in a financial crisis it is imperative to keep inflation expectations anchored.”