Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper No. 209 http://www.dallasfed.org/assets/documents/institute/wpapers/2014/0209.pdf Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective* Frederic S. Mishkin Columbia University and National Bureau of Economic Research Eugene N. White Rutgers University and National Bureau of Economic Research October 2014 Abstract Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules---notably Bagehot’s rule---that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks’ crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules that permitted pre- emptive actions to forestall worse crises but were combined with measures to mitigate moral hazard. JEL codes: E58, G01, N10, N20 * Frederic S. Mishkin, Columbia Business School, 3022 Broadway, Uris Hall 817, New York, NY 10027. 212-854-3488.
[email protected]. Eugene N. White, Rutgers University, Department of Economics, New Jersey Hall, 75 Hamilton Street, New Brunswick, NJ 08901. 732-932-7363.
[email protected]. Prepared for the conference, “The Federal Reserve System’s Role in the Global Economy: An Historical Perspective” at the Federal Reserve Bank of Dallas, September 18-19, 2014.