Monetary policy in crisis

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 20th 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.

Recent comments



  • Asif Ruman says:

    ‘So-called unconventional monetary policies’. My work shows it empirically! I like your stance on ‘conventional’ MP.

  • Dan Thorntpn says:

    Send us the working paper. Please.

  • Charles Layne says:

    The Federal Govt created the central bank to manage the money supply but maintained control of the real tools needed to manage the money supply, namely taxing and spending. The problems in the system can be traced to this separation of tools from the responsible entity.

    • Dan Thorntpn says:

      I don’t agree. You must have a Phillips curve theory of inflation to make government spending and taxation cause inflation and the Phillips curve theory has faired no better than the money supply theory. The sad fact is that economists don’t have a theory of inflation that has any degree of predictive power. Of course, this means economists don’t have THEORY of inflation.

  • Liting Su says:

    Dr. Thornton, thank you for your excellent keynote paper! It’s a privilege to be able to read it here and make comments. I wonder what you think about the following statement? That “The best way to ensure a successful currency is to once again permit Congress to print debt-free currency just like Lincoln pushed for and succeeded in doing” or the concept of “debt-free currency” itself is an untenable concept since money is always an IOU? -Liting

  • Greg Hannsgen says:

    For an alternative heterodox view, many readers might enjoy the following paper, which is a nice summary of the post-Keynesian view on endogenous money in light of developments in policymaking that went hand in hand with “new Classical” and “new Keynesian” macroeconomics.
    “The Money Supply in Macroeconomics” by Peter Howells

    Of related interest is Post-Keynesian stock-flow-consistent macro-modeling, which is a heterodox approach that perhaps also allows a larger role for stock-related impacts of monetary policy than New Keynesian macroeconomics, including the [Wynne] “Godley” interest-payments effect.

    Modern Monetary Theory is another body of theories which hold that it is mostly the monetary aggregates and not policy interest rates that are endogenous in the relevant senses of the word. A primer on this theory can be found at this link:

    Perhaps obviously, I found myself moved to disagree by the section of the paper on Fed operating procedures. On the other hand, I would agree that empirically interest rate changes have little impact on most types of spending, especially business investment.

    The paper raises and takes positions on some very interesting and important issues in monetary theory and policy. As an academic work, I would expect it to be a part of a debate that takes place mostly among neoclassical economists.

  • James Swofford says:

    Dan, As Hicks said in 1935: “It was marginal utility that made sense of the theory of value; and to come to a branch of economics that does without marginal utility altogether! No wonder there are such difficulties and differences! What is wanted is a ‘marginal revolution’!” I have quoted this is a few papers: I think you and many of us here are following the advice of Hicks and really on the same general page as Fama when it comes to the ability of a central bank to determine interest rates.

    A real oddity to me is the desire to confuse during the recent financial driven economic turn down. Ultimately it comes down to what quantity is being eased and why when you have a perfectly good term for targeting monetary aggregates again when nominal interest rates approach the zero bound. Why a new term, ie quantitative easing, if the goal is not to hide that monetary targeting is the new policy?