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11 - The development of “non-traditional” open market operations: Lessons from FDR's silver purchase program

Published online by Cambridge University Press:  04 August 2010

By
Burdekin Richard C. K.  and
Weidenmier Marc D.
Edited by
Jeremy Atack  and
Larry Neal
Jeremy Atack
Affiliation:
Vanderbilt University, Tennessee
Larry Neal
Affiliation:
University of Illinois, Urbana-Champaign
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Summary

Current Federal Reserve Chairman Ben Bernanke (2002) stoked interest in alternatives to conventional open market operations with his consideration of “non-traditional” monetary policy strategies that might be more effective in a low, or zero, interest rate environment. Under such circumstances, the interest rate transmission mechanism for traditional monetary expansion via purchases of government securities becomes less effective. Moreover, if deflation is accompanied by banking crisis, as was the case in the US in the 1930s, then the hoarding of reserves and curtailed bank lending lowers the money multiplier and further emasculates monetary policy. This 1930s-type scenario once again came to the fore in Asia, and Hutchison (2004) ties Japan's declining money multiplier and reduced output effects of monetary expansion after 1997 to a credit crunch associated with banking sector difficulties and lending cutbacks. This has led to calls for broadened monetary policy that is not so dependent upon the interest rate channel and upon banks' willingness to actually lend out the extra reserves generated via traditional open market operations. Fukao, for example, has argued that “laws must be amended to allow the Bank of Japan to buy all securities, not just bonds, for its open market operations and purchase real assets … up to a few trillion yen per month.”

Type
Chapter
Information
The Origins and Development of Financial Markets and Institutions
From the Seventeenth Century to the Present
 , pp. 319 - 344
Publisher: Cambridge University Press
Print publication year: 2009

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