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The Federal Reserve’s response to the financial crisis: what it did and what it should have done

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  • Daniel L. Thornton

Abstract

This paper analyzes the Federal Reserve?s major policy actions in response to the financial crisis. The analysis is divided into the pre-Lehman and post-Lehman monetary policies. Specifically, I describe the pre- and post-Lehman monetary policy actions that I believe were appropriate and those that were not. I then describe the monetary policy actions the Fed should have taken and why those actions would have fostered better financial market and economic outcomes. Had these actions been taken, the Fed?s balance sheet would have returned to normal and the FOMC?s target for the federal funds rate would be a level consistent with a positive real rate and an inflation target of 2 percent.

Suggested Citation

  • Daniel L. Thornton, 2012. "The Federal Reserve’s response to the financial crisis: what it did and what it should have done," Working Papers 2012-050, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2012-050
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    References listed on IDEAS

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    Cited by:

    1. Stefanescu, Razvan & Dumitriu, Ramona, 2016. "Particularitǎţi ale evoluţiei variabilelor financiare [Some particularities of the financial variables evolution]," MPRA Paper 73481, University Library of Munich, Germany, revised 02 Sep 2016.
    2. Smales, Lee A. & Apergis, Nick, 2016. "The influence of FOMC member characteristics on the monetary policy decision-making process," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 216-231.
    3. Ferrari, Massimo, 2014. "The financial meltdown: a model with endogenous default probability," MPRA Paper 59419, University Library of Munich, Germany.

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    Federal Reserve banks; Monetary policy; Financial crises;
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