The Need to Return to a Monetary Framework

This paper examines the 100-fold increase in reserve balances at the Fed during the second half of 2008. By looking at the balance sheet of the Fed and the factors influencing the supply and demand for reserves, the paper shows that the increase was due to large purchases of securities and loans to certain sectors and institutions. Such actions constitute a combination of monetary policy and industrial policy, which might be called mondustrial policy. This characterization raises questions about the role of the Fed and suggests the need to return to a monetary framework.