Prices and Quantities in the Monetary Policy Transmission Mechanism
by Tobias Adriana and Hyun Song Shinb
Central banks have a variety of tools for implementing monetary
policy, but the tool that has received the most attention
in the literature has been the overnight interest rate. The
financial crisis that erupted in the summer of 2007 has refocused
attention on other channels of monetary policy, notably
the transmission of policy through the supply of credit and
overall conditions in the capital markets. In 2008, the Federal
Reserve put into place various lender-of-last-resort programs
under section 13(3) of the Federal Reserve Act in order to cushion
the strains on financial intermediaries’ balance sheets and
thereby target the unusually wide spreads in a variety of credit
markets. While classic monetary policy targets a price (for
example, the federal funds rate), the liquidity facilities affect
balance-sheet quantities. The financial crisis forcefully demonstrated
that the collapse of the financial sector’s balance-sheet
capacity can have powerful adverse effects on the real economy.
We reexamine the distinctions between prices and quantities
in monetary policy transmission.
JEL Codes: E44, E52, E58, G18, G28.
(PDF, 12 pages 221 kb)
a Federal Reserve Bank of New York
b Princeton University