Review

This article was originally presented as the Homer Jones Memorial Lecture, organized by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, April 1, 2010.

The authors examine the experience of selected central banks that have used large-scale balance-sheet expansion, frequently referred to as "quantitative easing," as a monetary policy instrument.

"When confidence is lost, liquidity dries up." The authors investigate the meaning of "confidence" and "liquidity" in the context of the recent financial crisis, which they maintain is a manifestation of an age-old problem with private money creation: banking panics.

A dilemma faced by forecasters is that data are not all sampled at the same frequency. Most macroeconomic data are sampled monthly (e.g., employment) or quarterly (e.g., GDP). Most financial variables (e.g., interest rates and asset prices), on the other hand, are sampled daily or even more frequently. The challenge is how to best use available data.