Prices and Quantities in the Monetary Policy Transmission Mechanism
Federal Reserve Bank of New York
Hyun Song Shin
Princeton University - Department of Economics
October 1, 2009
Federal Reserve Bank of New York Staff Report No. 396
Central banks have a variety of tools for implementing monetary policy, but the tool that has received the most attention in the literature has been the overnight interest rate. The financial crisis that erupted in the summer of 2007 has refocused attention on other channels of monetary policy, notably the transmission of policy through the supply of credit and overall conditions in the capital markets. In 2008, the Federal Reserve put into place various lender-of-last-resort programs under section 13(3) of the Federal Reserve Act in order to cushion the strains on financial intermediaries’ balance sheets and thereby target the unusually wide spreads in a variety of credit markets. While classic monetary policy targets a price (for example, the federal funds rate), the liquidity facilities affect balance-sheet quantities. The financial crisis forcefully demonstrated that the collapse of the financial sector’s balance-sheet capacity can have powerful adverse effects on the real economy. We reexamine the distinctions between prices and quantities
in monetary policy transmission.
Number of Pages in PDF File: 15
Keywords: monetary policy, liquidity facilities
JEL Classification: E52, E59, E02working papers series
Date posted: October 7, 2009 ; Last revised: November 10, 2010
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