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Economic Brief

Dec. 5, 2016

Richmond Fed Economists Explore the Role of Central Bank Lending in the Conduct of Monetary Policy

Richmond, Va.

Two senior policy advisors at the Richmond Fed make the case in the Bank’s latest Economic Brief that open market operations might be adequate to achieve interest rate control without resorting to extensive targeted lending.

Authors Huberto M. Ennis and John A. Weinberg explore two perspectives on the role of central bank lending in the conduct of monetary policy — one that views direct central bank lending to market participants as necessary at times and one that views such lending as nonessential for effective monetary policy implementation. Which perspective is favored largely depends on how policymakers assess frictions that inhibit the ability of financial markets to allocate liquidity, according to the authors.

They conclude that it’s possible such frictions could justify direct central bank lending in some situations, but argue that the potential costs of lending and our current limited understanding of those frictions suggest policymakers should be cautious about subscribing to such an approach.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on current economic issues and trends. Sign up to receive an email notification when a new essay is posted.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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