Monetary Policy in the 2008-2009 Recession

Monetary Policy in the 2008-2009 Recession
Robert L. Hetzel
Federal Reserve Bank of Richmond
Richmond, VA 23261
February 9, 2009

Two explanations compete to explain the 2008 recession. Both start with a combination of real shocks due to a fall in housing wealth and a fall in real income from an increase in energy prices. One explanation emphasizes propagation of this shock through dysfunctional credit markets. The other emphasizes propagation through contractionary monetary policy. The first explanation stresses the importance of credit-market interventions (credit policy). The second emphasizes the importance of money creation (money-creation policy).
FOMC Chairman William McChesney Martin: “The System should always be engaged in a ruthless examination of its past record.” (FOMC Minutes, 11/26/68, p. 1456)

This paper expresses the ideas of the author. Readers should not attribute them to the Federal Reserve Bank of Richmond. [more]