The monetary mechanics of the crisis. Bruegel Policy Contribution 2009/08, August 2009

von Hagen, Jürgen. (2009) The monetary mechanics of the crisis. Bruegel Policy Contribution 2009/08, August 2009.

Abstract

In this paper, we take a look at the monetary mechanics of the crisis. That is, we take a look at the money and credit supply processes in the US, the UK, and the euro area to trace the events and developments in terms of the structure of and developments in the balance sheets of the banking sector and the central banks. Money supply data is complementary to the interest rate data previous studies have focused on. 2 It reflects the reactions of non-banks, banks, and central banks to the crisis in terms of their holdings of cash and central bank reserves, deposits, interbank credit, and credit supply. While previous studies of the 'unconventional monetary policy reactions' have considered the developments in the central bank balance sheets since September 2008 (see eg. Meier, 2009), the monetary data can link these developments to the money and credit supply. After a brief explanation of the money and credit supply processes in section 2, we begin, in section 3, with an illustration of what happened in the US during the 1929 crisis and in the 1930s. This provides an interesting reference point for the most recent developments in the US, the UK, and the euro area. In section 4, we then analyse the monetary mechanics of the crisis in the US, the UK, and the euro area. Section 5 ends with some policy conclusions.