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Lessons for monetary policy strategies from the recent past

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Author Info

  • Stephan Fahr

    (European Central Bank)

  • Roberto Motto

    (European Central Bank)

  • Massimo Rostagno

    (European Central Bank)

  • Frank Smets

    (European Central Bank)

  • Oreste Tristani

    (European Central Bank)

Abstract

We evaluate the ECB’s monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the ECB’s strategy was successful at ensuring macroeconomic stability and steady growth. Emphasis on monetary indicators in the policy process - the monetary pillar of the ECB’s monetary policy strategy - was instrumental in avoiding more volatile and less predictable patterns of inflation and output growth. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to preserve the integrity of the monetary policy transmission mechanism by adopting a comprehensive package of non-standard policy measures. The liquidity interventions decided in October 2008 and in May 2009 were critical to preserving price stability and forestalling a more disruptive collapse of the macroeconomy.

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Bibliographic Info

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This chapter was published in:

  • Marek Jarocinski & Frank Smets & Christian Thimann (ed.), 2011. "Approaches to monetary policy revisited - lessons from the crisis, 6th ECB Central Banking Conference, 18-19 November 2010," Books, European Central Bank, number cbc6.
    This item is provided by European Central Bank in its series Chapters with number cbc6-02.

    Handle: RePEc:ecb:chaptr:cbc6-02

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    1. Lawrence Christiano & Cosmin L. Ilut & Roberto Motto & Massimo Rostagno, 2010. "Monetary Policy and Stock Market Booms," NBER Working Papers 16402, National Bureau of Economic Research, Inc.
    2. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," NBER Working Papers 11728, National Bureau of Economic Research, Inc.
    3. Meredith J. Beechey & Benjamin K. Johannsen & Andrew T. Levin, 2011. "Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 104-29, April.
    4. Gary B. Gorton, 2009. "Information, Liquidity, and the (Ongoing) Panic of 2007," NBER Working Papers 14649, National Bureau of Economic Research, Inc.
    5. Michael Ehrmann & Sylvester Eijffinger & Marcel Fratzscher, 2010. "The role of central bank transparency for guiding private sector forecasts," Working Paper Series 1146, European Central Bank.
    6. Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2010. "Monetary policy in exceptional times," CEPR Discussion Papers 7669, C.E.P.R. Discussion Papers.
    7. Gabriele Galati & Steven Poelhekke & Chen Zhou, 2009. "Did the crisis affect inflation expectations?," DNB Working Papers 222, Netherlands Central Bank, Research Department.
    8. Florian Heider & Marie Hoerova & Cornelia Holthausen, 2009. "Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk," Working Paper Series 1126, European Central Bank.
    9. Vasco Cúrdia & Michael Woodford, 2010. "The central-bank balance sheet as an instrument of monetary policy," Staff Reports 463, Federal Reserve Bank of New York.
    10. Matteo Ciccarelli & Angela Maddaloni & José-Luis Peydró, 2010. "Trusting the bankers: a new look at the credit channel of monetary policy," Working Paper Series 1228, European Central Bank.
    11. Jiminez, G. & Ongena, S. & Saurina, J., 2007. "Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?," Discussion Paper 2007-75, Tilburg University, Center for Economic Research.
    12. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
    13. Casper van Ewijk & Henri L.F. de Groot & Coos Santing, 2010. "A Meta-Analysis of the Equity Premium," Tinbergen Institute Discussion Papers 10-078/3, Tinbergen Institute.
    14. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2010. "Risk, Uncertainty and Monetary Policy," CEPR Discussion Papers 8154, C.E.P.R. Discussion Papers.
    15. Nuno Cassola & Alain Durré & Cornelia Holthausen, 2011. "Implementing monetary policy in the crisis times - the case of the ECB," Chapters, European Central Bank.
    16. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
    17. Carsten Detken & Frank Smets, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank.
    18. Benati, Luca & Goodhart, Charles, 2010. "Monetary Policy Regimes and Economic Performance: The Historical Record, 1979-2008," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 21, pages 1159-1236 Elsevier.
    19. Luca Benati, 2009. "Long Run Evidence on Money Growth and Inflation," Working Paper Series 1027, European Central Bank.
    20. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
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    Cited by:
    1. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages F271-F288, November.
    2. John Geanakoplos, 2011. "Panel Statement - Endogenous leverage and default," Chapters, European Central Bank.
    3. Kotaro Ishi & Kenji Fujita & Mark R. Stone, 2011. "Should Unconventional Balance Sheet Policies be Added to the Central Bank Toolkit? A Review of the Experience So Far," IMF Working Papers 11/145, International Monetary Fund.
    4. Kristóf Lehmann, 2012. "International experiences with unconventional central bank instruments," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 7(2), pages 24-30, June.

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