Working Paper: NBER ID: w14134
Authors: Stephen G. Cecchetti
Abstract: Realizing that their traditional instruments were inadequate for responding to the crisis that began on 9 August 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes directed at ensuring that liquidity would be distributed to those institutions that needed it most. Conceptually, this meant America's central bankers shifted from focusing solely on the size of their balance sheet, which they use to keep the overnight interbank lending rate close to their chosen target, to manipulating the composition of their assets as well. In this paper, I examine the Federal Reserve's conventional and unconventional responses to the financial crisis of 2007-2008.
Keywords: Federal Reserve; Financial Crisis; Monetary Policy
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's shift from traditional monetary policy tools to unconventional measures (E52) | liquidity crises (G01) |
| introduction of the Term Auction Facility (TAF) and Primary Dealer Credit Facility (PDCF) (E52) | alleviation of liquidity issues (G33) |
| Federal Reserve's recognition of limitations of traditional tools (E52) | creation of new lending procedures like TAF and PDCF (E52) |
| introduction of TAF and PDCF (F38) | stabilization of financial markets (E44) |
| policies may have mitigated short-term liquidity issues (G33) | broader effects of the financial crisis on real economic activity (E44) |