Central Banking Since the 2008 Financial Crisis

by Robert P. Murphy

In chapter 5 we reviewed the textbook analysis of how a central bank buys government debt in “open market operations” to add reserves to the banking system, with which commercial banks can then advance loans to their own customers. However, in the wake of the financial crisis of 2008, the Federal Reserve and other central banks around the world adopted new “tools” (the term often used) to influence economic activity.

In this chapter we will first elaborate on conventional monetary policy, and then explain why it had apparently “lost traction” after the fall of 2008. We will then summarize some of the major changes to the practice of central banking since the financial crisis. Although we will focus on the Federal Reserve, much of our commentary is applicable to other central banks.

Before proceeding, we should clarify for the reader that most of the discussion in this chapter will be standard, with many of the details coming from Federal Reserve publications. However, even though it is legitimate to rely on establishment sources to document what they did, it is more dubious to take at face value their explanations for why they did it.

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