NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Is Monetary Policy Effective During Financial Crises?

Frederic S. Mishkin

NBER Working Paper No. 14678
Issued in January 2009
NBER Program(s):   EFG   ME

This short paper argues that the view that monetary policy is ineffective during financial crises is not only wrong, but may promote policy inaction in the face of a severe contractionary shock. To the contrary, monetary policy is more potent during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely. The fact that monetary policy is more potent than during normal times provides a rationale for a risk-management approach to counter the contractionary effects from financial crises, in which monetary policy is far less inertial than would otherwise be typical -- not only by moving decisively through conventional or nonconventional means to reduce downside risks from the financial disruption, but also in being prepared to quickly take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.

download in pdf format
   (43 K)

email paper

This paper is available as PDF (43 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14678

Published: Frederic S. Mishkin, 2009. "Is Monetary Policy Effective during Financial Crises?," American Economic Review, American Economic Association, vol. 99(2), pages 573-77, May.

Users who downloaded this paper also downloaded these:
Krishnamurthy and Vissing-Jorgensen w17555 The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy
Mishkin w16755 Monetary Policy Strategy: Lessons from the Crisis
Kashyap and Stein Monetary Policy and Bank Lending
Mishkin w8617 The Transmission Mechanism and the Role of Asset Prices in Monetary Policy
Hatzius, Hooper, Mishkin, Schoenholtz, and Watson w16150 Financial Conditions Indexes: A Fresh Look after the Financial Crisis
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us