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Conventional and Unconventional Monetary Policy

65 Pages Posted: 13 Nov 2009  

Vasco Cúrdia

Federal Reserve Bank of San Francisco

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: November 1, 2009

Abstract

We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank’s balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy-variations in the size and composition of the central bank’s balance sheet as well as payment of interest on reserves-alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not.

Keywords: unconventional monetary policy, credit policy, zero lower bound, central bank balance sheet

JEL Classification: E40, E50

Suggested Citation

Cúrdia, Vasco and Woodford, Michael, Conventional and Unconventional Monetary Policy (November 1, 2009). FRB of New York Staff Report No. 404. Available at SSRN: https://ssrn.com/abstract=1504864 or http://dx.doi.org/10.2139/ssrn.1504864

Vasco Cúrdia (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
MS 1130
San Francisco, CA 94105
United States
(415) 977-3624 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/staff.php?vcurdia

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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