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Lessons for monetary policy strategies from the recent past

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  • 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, October.
    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. 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.
    2. 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.
    3. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2010. "Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk," CEPR Discussion Papers 7762, C.E.P.R. Discussion Papers.
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    5. 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.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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    8. 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.
    9. Ehrmann, M. & Eijffinger, S.C.W. & Fratzcher, M., 2010. "The Role of Central Bank Transparency for Guiding Private Sector Forecasts," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3763052, Tilburg University.
    10. Jiménez, Gabriel & Ongena, Steven & Peydró-Alcalde, José Luis & Saurina, Jesús, 2007. "Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk?," CEPR Discussion Papers 6514, C.E.P.R. Discussion Papers.
    11. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2010. "Risk, Uncertainty and Monetary Policy," CEPR Discussion Papers 8154, C.E.P.R. Discussion Papers.
    12. Ciccarelli, Matteo & Peydró, José-Luis & Maddaloni, Angela, 2010. "Trusting the bankers: a new look at the credit channel of monetary policy," Working Paper Series 1228, European Central Bank.
    13. Nuno Cassola & Alain Durré & Cornelia Holthausen, 2011. "Implementing monetary policy in the crisis times - the case of the ECB," Chapters, European Central Bank.
    14. Gabriele Galati & Steven Poelhekke & Chen Zhou, 2009. "Did the crisis affect inflation expectations?," DNB Working Papers 222, Netherlands Central Bank, Research Department.
    15. 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.
    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.
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    Cited by:
    1. Domenico Giannone & Michèle Lenza & Huw Pill & Lucrezia Reichlin, 2012. "The ECB and the Interbank Market," Working Papers ECARES ECARES 2012-005, ULB -- Universite Libre de Bruxelles.
    2. William R. White, 2013. "Is Monetary Policy a Science? The Interaction of Theory and Practice over the Last 50 Years," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
    3. John Geanakoplos, 2011. "Panel Statement - Endogenous leverage and default," Chapters, European Central Bank.
    4. 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.
    5. Kristóf Lehmann & Róbert Mátrai & György Pulai, 2013. "Measures taken by the Federal Reserve System and the European Central Bank during the crisis," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 8(Special), pages 98-107, October.
    6. 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.
    7. William R. White, 2012. "Ultra easy monetary policy and the law of unintended consequences," Globalization and Monetary Policy Institute Working Paper 126, Federal Reserve Bank of Dallas.
    8. William R. White, 2013. "Is monetary policy a science? the interaction of theory and practice over the last 50 years," Globalization and Monetary Policy Institute Working Paper 155, Federal Reserve Bank of Dallas.
    9. 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.

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