Is Monetary Policy Effective During Financial Crises?

17 Pages Posted: 31 Jan 2009 Last revised: 11 Aug 2010

See all articles by Frederic S. Mishkin

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: January 2009

Abstract

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.

Suggested Citation

Mishkin, Frederic S., Is Monetary Policy Effective During Financial Crises? (January 2009). NBER Working Paper No. w14678, Available at SSRN: https://ssrn.com/abstract=1335704

Frederic S. Mishkin (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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