Monetary Policy in a Systemic Crisis
37 Pages Posted: 10 Nov 2009
Date Written: November 10, 2009
This paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort. It is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend upon the well functioning of the interbank market. As the crisis developed, liquidity vanished and the interbank market collapsed, central banks had to inject much more liquidity at low interest rates than predicted by standard monetary policy models. At the same time, as the interbank market did not allow for the redistribution of liquidity among banks, central banks had to design new channels for liquidity injection.
Keywords: monetary policy, financial crisis, lender of last resort, interbank market, liquidity
JEL Classification: G00
Suggested Citation: Suggested Citation