Prices and Quantities in the Monetary Policy Transmission Mechanism

15 Pages Posted: 7 Oct 2009 Last revised: 10 Nov 2010

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: October 1, 2009

Abstract

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.

Keywords: monetary policy, liquidity facilities

JEL Classification: E52, E59, E02

Suggested Citation

Adrian, Tobias and Shin, Hyun Song, Prices and Quantities in the Monetary Policy Transmission Mechanism (October 1, 2009). Federal Reserve Bank of New York Staff Report No. 396. Available at SSRN: https://ssrn.com/abstract=1483825 or http://dx.doi.org/10.2139/ssrn.1483825

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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