The Fed's response to the financial crisis: Pages from the BOJ playbook, or a whole new ball game?

Abstract

Like the Bank of Japan (BOJ) a decade ago, the U.S. Federal Reserve (Fed) has recently taken a number of unprecedented steps to stabilize its foundering financial system. This paper describes the Fed’s and the BOJ’s responses to their countries’ crises, highlighting the similarities and differences between the two banks’ policies. Both banks acted as lenders of last resort, providing the short-term funding necessary to prevent full-blown liquidity crises. Circumstances compelled the Fed to act much more quickly than the BOJ, however. And, in its direct involvement in the provision of credit to the private sector and its assumption of banks’ credit risk, the Fed has intervened in the financial markets more extensively than the BOJ. Disparities in the speed and scope of the two countries’ crises help explain the Fed’s relatively more aggressive response. The more heavily securitized financial structure in the U.S. and the Fed’s relaxed stance on credit risk also may account for the Fed’s more interventionist policies. JEL codes: E42, E58, E65. ∗Williams College Economics Department, Schapiro Hall 312, 24 Hopkins Hall Drive, Williamstown, MA, 01267, USA. kenneth.n.kuttner@williams.edu. Prepared for the March 24 2009 International Conference on the U.S. Economy, organized by the Policy Research Institute, Ministry of Finance, Japan. I am grateful to Shigenori Shiratsuka for his help in obtaining historical BOJ balance sheet data, and to Toshiki Jinushi, Takatoshi Ito, and the conference participants for their helpful comments.