We propose a model where monetary policy is the key determinant of aggregate asset prices (financial conditions). Spending decisions are made by a group of agents ("households") that respond to aggregate asset prices, but with noise, delays, and inertia. Asset pricing is determined by a...

This article summarizes empirical research on the interaction between monetary policy and asset markets, and reviews our previous theoretical work that captures these interactions. We present a concise model in which monetary policy impacts the aggregate asset price, which in turn influences...

Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the Global Financial Crisis (GFC). We document, however,...

This paper shows that the disproportionate impact of tight monetary policy on banks' ability to lend is largely the consequence of Federal Reserve actions aimed at reducing bank loans directly, rather than an inherent feature of the monetary transmission mechanism. We provide two types of...

Emerging economies experience sudden stops in capital inflows. As we have argued in Caballero and Krishnamurthy (2002), having access to monetary policy during these sudden stops is useful, but mostly for insurance' rather than for aggregate demand reasons. In this environment, a central bank...

During the booms that precede crises in emerging economies, policymakers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is a sterilization of capital inflows - essentially a swap of international reserves for public bonds. Despite...

Central banks (the Fed) and markets (the market) often disagree about the path of interest rates. We develop a model that explains this disagreement and study its implications for monetary policy and asset prices. We assume that the Fed and the market disagree about expected aggregate demand....

Conventional measures of monetary policy, such as the federal funds rate, are surely influenced by forces other than monetary policy. More importantly, central banks adjust policy in response to a wide range of information about future economic developments. As a result, estimates of the effects...

This paper examines changes over time in the importance of the lending channel in the transmission of monetary shocks to the real economy. We first use a simple extension of the Bernanke-Blinder model to isolate the observable factors that affect the strength of the lending channel. We then show...

This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz's monetary explanation provided by...