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Monetary Policy in a Downturn: Are Financial Crises Special?

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  • Morten L. Bech
  • Leonardo Gambacorta
  • Enisse Kharroubi

Abstract

This paper analyses the effectiveness of monetary policy during downturns associated with financial crises. Based on a sample of 24 developed countries, our empirical analysis suggests that monetary policy is less effective following a financial crisis as the monetary transmission mechanism is partially impaired. In particular, our results suggest that the benefits of accommodative monetary policy during a downturn are elusive when the downturn is associated with a financial crisis. In addition, we find that private sector deleveraging during a downturn helps to induce a stronger recovery.

Suggested Citation

  • Morten L. Bech & Leonardo Gambacorta & Enisse Kharroubi, 2014. "Monetary Policy in a Downturn: Are Financial Crises Special?," International Finance, Wiley Blackwell, vol. 17(1), pages 99-119, March.
  • Handle: RePEc:bla:intfin:v:17:y:2014:i:1:p:99-119
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