Monetary policy in crisis
Daniel L. Thornton
Former Vice President and Economic Advisor at the Federal Reserve Bank of St. Louis, Currently Principle of D.L. Thornton Economics LLC, USA
Please cite the paper as:
Daniel L. Thornton, (2018), Monetary policy in crisis, World Economics Association (WEA) Conferences, No. 1 2018, Monetary Policy after the Global Crisis, 19th February to 2nd April, 2018
This paper argues contemporary monetary policy is based on a model and ideas that have extremely weak to nonexistent theoretical foundations and are void of strong empirical support. The paper argues that this is also true of the monetary policies pursued in the wake of the financial crisis. These so-called unconventional monetary policies are based on theories or ideas that are demonstratively false. Worse yet, policymakers and others claim that these policies have been successful by ignoring the fact the evidence that is cited has been shown to be based on faulty empirical analysis or evidence that is so weak that it shouldn’t be cited at all. Finally, the paper argues that the widespread practice of implementing monetary policy by targeting the overnight interbank rate is dangerous in that it has distorted yields across the term structure and, thereby, the allocation of economic resources.