What monetary policy was employed during the crisis?
“There was a period when rates on the interbank lending market – the rates that apply to loans between banks – were much higher than the official rate, when in normal circumstances they’d basically be the same.”
“The dramatic cuts in the interest rates determined by central banks were not sufficiently reflected in the rates that really affect companies and households. As a result, they didn’t generate as large an economic stimulus as would have been desired.”
“We found ourselves in a situation without precedent in recent decades: inflation kept falling, unemployment rates were rising, and growth was negative. So central banks had every reason to cut interest rates. But there’s a limit on interest-rate policy, and it’s called “zero”. Interest rates can’t be reduced below zero.”
“During the crisis the European Central Bank has had to gradually relax quality requirements for assets used as collateral, to the point that now practically any asset that’s not a junk asset can be used as collateral, even if it doesn’t have very high ratings.”
“When central banks reach the lower bound on official interest rates – the zero rate – obviously they can’t cut this rate any further, but they can use forward guidance to try to influence investor expectations about future interest rates.”