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A monetary policy strategy in good and bad times: lessons from the recent past

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  • Fahr, Stephan
  • Motto, Roberto
  • Rostagno, Massimo
  • Smets, Frank
  • Tristani, Oreste

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 strategy was successful at ensuring macroeconomic stability and steady growth despite shocks to the supply side and to the transmission mechanism which complicated the policy process. Emphasis on monetary indicators in the ECB’s monetary policy strategy – the monetary pillar – was instrumental in avoiding more volatile and less predictable patterns of inflation and 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. According to our quantitative evaluation of the impact of the non-standard policy package, which notably did not include entering commitments regarding the future path of the policy rate, 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 macro-economy. JEL Classification: E31, E44, E51, E58

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1336.

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Date of creation: May 2011
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Handle: RePEc:ecb:ecbwps:20111336

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Keywords: credit; financial crisis; monetary policy; monetary transmission; Non-standard policy measures; Supply factors;

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References

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Citations

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Cited by:
  1. Cour-Thimann, Philippine & Winkler, Bernhard, 2013. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Working Paper Series 1528, European Central Bank.
  2. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2013. "The effectiveness of the non-standard policy measures during the financial crises: the experiences of the federal reserve and the European Central Bank," Working Paper Series 1562, European Central Bank.
  3. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2012. "What causes banking crises? An empirical investigation," Cardiff Economics Working Papers E2012/14, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2013.
  4. Abbassi, Puriya & Linzert, Tobias, 2012. "The effectiveness of monetary policy in steering money market rates during the financial crisis," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 945-954.
  5. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2014. "The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 107-129.
  6. Issing, Otmar, 2011. "Lessons for monetary policy: What should the consensus be?," CFS Working Paper Series 2011/13, Center for Financial Studies (CFS).
  7. Otmar Issing, 2011. "Lessons for Monetary Policy," IMF Working Papers 11/97, International Monetary Fund.
  8. Panzera, Fabio S., 2011. "Price stability and financial imbalances: rethinking the macrofinancial framework after the 2007-8 financial crisis," FSES Working Papers 423, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  9. Christiaan Pattipeilohy & Jan Willem van den End & Mostafa Tabbae & Jon Frost & Jakob de Haan, 2013. "Unconventional monetary policy of the ECB during the financial crisis: An assessment and new evidence," DNB Working Papers 381, Netherlands Central Bank, Research Department.
  10. Otmar Issing, 2011. "Lessons for monetary policy: what should the consensus be?," Globalization and Monetary Policy Institute Working Paper 81, Federal Reserve Bank of Dallas.
  11. Dumitriu, Ramona & Stefanescu, Răzvan, 2013. "Decizii strategice ale politicii monetare
    [Strategic decisions of the Monetary Policy]
    ," MPRA Paper 51242, University Library of Munich, Germany, revised 05 Nov 2013.

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