Monetary Policy After August 2007

Abstract

In this article, the author describes conceptually how to think about the dramatic changes in monetary policy since the sub-prime crisis of August 2007. He also discusses how to incorporate these changes and related economic concepts in the teaching of an undergraduate class in macroeconomics. A distinction is made between conventional and unconventional monetary policy, both conceptually and in practice, but most of the focus is on unconventional monetary policy and how it can be integrated within a standard macroeconomic framework. Some attention is also given to the relevance of the liquidity trap and forward guidance in monetary policy.

Keywords:

• Federal Reserve
• liquidity trap
• monetary policy
• quantitative easing

JEL codes:

• E53
• E58

Notes

1. See, for example, Clarida, Gali, and Gertler (2000).

2. See Bernanke and Gertler (1989) for a formal analysis of how capital market frictions induce a spread between borrowing and lending rates.

3. See Gertler and Karadi (2011) for a formal analysis of QE.