The Effect of the Financial Crisis on the Efficiency of Conventional Monetary Policy in the Eurozone[El impacto de la crisis financiera en los resultados de la política monetaria convencional en la zona del euro]

This paper analyses the consequences of the financial crisis on the implementation of ECB conventional policy decisions.We use the three equation new Keynesian model that was widely adopted before the 2007 financial crisis as the benchmark of the analysis.Our main results underline a decrease in conventional monetary policy efficiency, following two main factors.On the one side, we observe a worsening of the arbitrage between the variance of activity and that of inflation (namely the Taylor curve).On the other side, our analysis underlines a clear departure from the efficiency frontier (as measured by the Taylor curve) coming from a high increase in the output gap.We find that to overcome part of this inefficiency the ECB should have set lower interest rates than observed, even negative by the end of the period of our analysis.This result provides a simple rationale for the adoption of new unconventional policy practices to overcome the consequences of the financial crisis.