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Discussion Paper Details

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Title: A primer on unconventional monetary policy

Author(s): Peter Bofinger and Sebastian Debes

Publication Date: March 2010

Keyword(s): bank regulation, maturity transformation, money multiplier, money supply process and unconventional monetary policy

Programme Area(s): International Macroeconomics

Abstract: Due to the severity of the financial market crisis most central banks reached the limits of their traditional monetary policy instruments and relied to a very large extent on instruments of unconventional monetary policy. In our paper we develop a simple theoretical framework for the money supply process which is able to analyze the need for such measures as well as their implications for the banking system. The paper starts with a presentation of a price-theoretic model for the money supply under "normal conditions". It then shows how the different shocks of the financial market crisis have affected the market for bank loans and how a central can compensate such shocks. The need for unconventional measures derives from the size of these shocks and the zero lower bound of the central bank's policy rate. Under such conditions the central bank can only stabilize the loan market by providing direct loans to the non-bank sector. A by-product of this approach is a net creditor position of the banking system vis-�-vis the central bank which can lead to high excess reserves and a "decoupling" of the policy rate and the level of reserves. The paper also discusses the impact of bank losses and the role of maturity transformation on the banks' loan supply.

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Bibliographic Reference

Bofinger, P and Debes, S. 2010. 'A primer on unconventional monetary policy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7755