Heterodox central banking

Abstract

"In response to the current global crisis, the U.S. Federal Reserve and other central banks around the world have implemented diverse policy measures, including purchasing a wide range of securities, lending to financial institutions, intervening in foreign exchange markets, and paying interest on reserves. Some central banks have also reduced monetary policy interest rates to minimum levels (reaching a lower bound) and have announced an explicit commitment to keep interest rates there for a prolonged period. This set of instruments contrasts with a conventional view—embedded in the predominant monetary policy models—in which a central bank controls only a short-term interest rate, such as the Federal Funds rate. Some of the previous actions may be classified as responses to increasing demand for liquidity in a context of enormous financial uncertainty. Examples of this liquidity provisioning by central banks are the repurchase operations initiated in many economies to provide U.S. dollar liquidity during the period surrounding the bankruptcy of Lehman Brothers. Other actions may be sorted into those attempting to deal with malfunctioning financial markets (insufficient lending to nonfinancial firms or high lending spreads) and those attempting to enhance the monetary policy stimulus under the lower-bound constraint..."