Working Paper: NBER ID: w14678
Authors: Frederic S. Mishkin
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E52; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggressive monetary policy easing (E52) | credit spreads (G12) |
| aggressive monetary policy easing (E52) | overall economic activity (E66) |
| aggressive monetary policy easing (E52) | valuation risk (G32) |
| aggressive monetary policy easing (E52) | macroeconomic risk (E66) |
| aggressive monetary policy easing (E52) | severity of recession (F44) |