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The Great RecessionLessons for Central Bankers$
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Jacob Braude, Zvi Eckstein, Stanley Fischer, and Karnit Flug

Print publication date: 2013

Print ISBN-13: 9780262018340

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018340.001.0001

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Monetary Policy Frameworks after the Great Financial Crisis

Monetary Policy Frameworks after the Great Financial Crisis

(p.21) 1 Monetary Policy Frameworks after the Great Financial Crisis
The Great Recession

Huw Pill

Frank Smets

The MIT Press

In the eyes of some, the great financial crisis has raised questions about whether price-stability oriented monetary policy frameworks – that, until only a few years ago, were credited with supporting a long period of global economic stability – remain appropriate. This chapter evaluates these claims on the basis of the ECB's experience. It argues that: (a) nonstandard policy measures targeted at repairing malfunctioning markets are potentially more efficient instruments to address financial crisis than reducing policy rates to their lower bound. By tackling malfunctioning financial markets directly and re-establishing monetary policy transmission, such measures enhance the effectiveness of the standard interest rate policy instrument and thus serve to achieve macro-stabilisation without inducing greater interest rate volatility; (b) a solid anchoring of inflation expectations stemming from the establishment of credible price stability-oriented policy frameworks has played a crucial role during the crisis, both as an automatic stabiliser and in preventing the emergence of a debt-deflation spiral; (c) analysis of monetary developments helps identify the excessive credit expansion underlying the creation of financial imbalances. All in all, the chapter concludes that the conduct of monetary policy should neither be changed fundamentally nor overburdened with additional objectives.

Keywords:   Financial crisis, Monetary policy, Unconventional policy measures, Monetary analysis, Inflation target, Price level targeting

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