What Have We Learnt?
Edited by Steven Kates
Chapter 8: Monetary Policies During the Financial Crisis: An Appraisal
Mervyn K. Lewis INTRODUCTION The primary goal of this chapter is to examine the monetary policies pursued in the major developed economies in response to the global financial turmoil. The initial responses revolved around ‘conventional’ monetary policy which controls the shortest market rate (overnight interbank rate, bill rate or repo rate) with the aim of affecting the general structure of interest rates, economic activity and prices. Authorities in the major countries drove these policy rates to low levels, in some cases effectively zero, much lower than those in the 1930s. When those policies failed to have the desired effects, the monetary authorities turned to so-called ‘unconventional’ monetary policies in the form of ‘quantitative easing’, effectively printing money and engaging in massive purchases of government bonds and other securities. In the case of the United States, for example, such a programme took place between January 2009 and March 2010. The Federal Reserve Bank then moved further into uncharted waters by undertaking a second round of quantitative easing and bond-buying between November 2010 and June 2011. Why have these unprecedented ‘unconventional’ actions been needed? Obviously the reason is that conventional policies did not work. But why was this the case? How could such low interest rates not stimulate the economy? And, if ultra-low interest rates could not do the job, why would quantitative easing that drives rates even lower be expected to produce a different result? Might, in fact, interest rates be too low? These are questions considered below, but first a...
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