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Lessons for monetary policy strategies from the recent past

  • 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)

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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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. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
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    8. 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.
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    13. 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, March.
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    15. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," NBER Working Papers 11728, National Bureau of Economic Research, Inc.
    16. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series 1027, European Central Bank.
    17. 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.
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    19. Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2010. "Monetary policy in exceptional times," Working Paper Series 1253, European Central Bank.
    20. 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.
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