Working Paper: NBER ID: w20737
Authors: Frederic S. Mishkin; Eugene N. White
Abstract: Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules—notably Bagehot’s rule—that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks’ crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules that permitted pre-emptive actions to forestall worse crises but were combined with measures to mitigate moral hazard.
Keywords: Federal Reserve; Financial Crisis; Central Banking; Historical Analysis
JEL Codes: E58; G01; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fed's interventions (E52) | stabilization of financial markets (E44) |
| Fed's preemptive monetary policy (E52) | necessary response to economic conditions (E66) |
| historical central bank interventions (E58) | Fed's actions (E52) |
| provision of liquidity to banks (G21) | prevented extensive banking crisis (F65) |