Central bankinginthecreditturmoil:AnassessmentofFederal Reserve practice

Centralbankingisunderstoodintermsofthefiscalfeaturesofmonetary,credit,and interest onreservespolicies.Monetarypolicy–expandingreservesbybuying Treasuries–transfersallrevenuefrommoneycreationdirectlytothefiscalauthorities. Credit policy–sellingTreasuriestofundloansoracquirenon-Treasurysecurities–is debt-financedfiscalpolicy.Interestonreservesfreesmonetarypolicytofundcredit policy independentlyofinterestratepolicy.Anambiguousboundaryofresponsibilities betweentheFedandthefiscalauthoritiescontributedtoeconomiccollapseinfall2008. ‘‘Accord’’principlesareproposedtoclarifyFedcreditpolicypowersandsecureits independenceonmonetaryandinterestratepolicy.TheFedneedsmoresurpluscapital from thefiscalauthoritiestobefullyflexibleagainstbothinflationanddeflationatthe zero interestbound