Monetary Policy and Central Banking

Monetary Policy and Central Banking

New Directions in Post-Keynesian Theory

Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye

Divided into two parts, this book presents a detailed, multi-faceted analysis of banking and monetary policy. The first part examines the role of central banks within an endogenous money framework. These chapters address post-Keynesian interest rate policy, monetary mercantilism, financial market organization and developing economies. In the second part of the book, the focus switches to the analysis of the financial crisis that began in 2007. The chapters in this section discuss the role of central banks in times of crisis.

Chapter 11: Quantitative Easing in the United States After the Crisis: Conflicting Views

Domenica Tropeano

Subjects: economics and finance, financial economics and regulation, money and banking, post-keynesian economics

Extract

Domenica Tropeano 1 INTRODUCTION This chapter deals with the conflicting interpretations of the monetary policy carried out by the Federal Reserve during the current financial crisis. This policy has been referred to as “quantitative easing”, because after interest rates have been lowered near the zero bound, the policy has consisted in the purchase of various types of assets from financial institutions, thereby greatly increasing banks’ excess reserves and overall liquidity in the system. With interest rates unable to go any lower, the Fed has returned to a policy focused on quantities (see Adrian and Shin, 2009). This time, however, unlike during the monetarist era, the problem is not to control some money aggregate but to expand as much as possible the supply of money and credit. Section 2 will present an overview of the main facts on the monetary policy carried out by the Federal Reserve during the 2007–08 financial crisis. In Section 3, the liquidity trap view of the current depression will be explained and the monetary policy of the central bank will be introduced within this framework. The main thesis is that the central bank will continue to flood the market with money to cause inflation or at least inflationary expectations. A depreciation would eventually do the same job too. In Section 4 an interpretation of the Fed’s monetary policy according to Minsky is presented. An easy monetary policy carried out beyond the lender-of-last-resort intervention might have the aim of sustaining the price of investment and validating...

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