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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. [Policy Paper]

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    Abstract

    In response to the financial and economic crisis, central banks, unlike in the 1930s, have created enormous amounts of money. There are fears that this will lead to inflation, but it is base money (the central bank's liabilities) that has expanded; total monetary aggregates have not. By contrast, in the 1930s, base money remained stable and monetary aggregates dropped. The reason for this is that in a crisis the relationship between the base money and monetary aggregates is altered. The money multiplier drops. It is therefore necessary to create more base money so that monetary aggregates remain stable. This is what central banks have done in the current crisis – and rightly so. They have learned the lessons of the Great Depression. This framework helps understand differences across countries. The crisis affected the euro area money and credit supply process much less than the US and the UK. Therefore, the European Central Bank was right to respond to the crisis with a less expansionary monetary policy than the Bank of England and the Federal Reserve. However, stabilising the money supply may not have been enough to stabilise the supply of credit.

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    Item Type: Policy Paper
    Subjects for non-EU documents: Countries > U.K.
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Policy Contributions
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 03 Sep 2009
    Page Range: p. 12
    Last Modified: 15 Feb 2011 18:15
    URI: http://aei.pitt.edu/id/eprint/11497

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