Modern Crisis-Dealing Practices

As the previous chapter has illustrated, central banks and other policymakers have the difficult task of policing banks when times are good, and the even more difficult task of deciding how to react when panic sets in the economy. More recently, policymakers have been switching to policies other than the manipulation of interest rates, aiming at increasing liquidity provision, to assist ailing banks. Such policy actions have been dubbed as “unconventional”. The lessons learned in the previous chapters can assist in the evaluation of the two most important and controversial policy actions in today’s world: Quantitative Easing (QE) and negative interest rates. An evaluation of the impact from modern policy responses such as quantitative easing and the imposition of negative interest rates in the US, Europe, and Japan suggests that the effect was not as significant as expected by policymakers, for reasons that have more to do with the interaction between monetary and fiscal policy.