Conventional and Unconventional Monetary Policy

66 Pages Posted: 17 Nov 2009

See all articles by Vasco Cúrdia

Vasco Cúrdia

Federal Reserve Bank of San Francisco

Michael Woodford

Columbia Business School - Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: October 2009


We extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads, and to allow a role for the central bank's balance sheet in equilibrium determination. 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, and payment of interest on reserves --- alongside the traditional question of the proper choice of an operating target for an overnight policy rate. We also give particular attention to 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 provide policy prescriptions that apply equally when financial markets work efficiently and when they are subject to substantial disruptions, and equally when the zero bound is reached and when it is not a concern.

Keywords: credit frictions, credit spread, interest on reserves, quantitative easing

JEL Classification: E52

Suggested Citation

Cúrdia, Vasco and Woodford, Michael, Conventional and Unconventional Monetary Policy (October 2009). CEPR Discussion Paper No. DP7514, Available at SSRN:

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)


Michael Woodford

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

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