The crisis and its impact on the conduct of monetary policy ... (Policy Brief 238 - September 2011)
12/09/11
The crisis and its repercussions on the conduct of monetary and fiscal policies (Policy Brief 238 - September 2011)
The financial crisis triggered in 2007 has deeply transformed the role of economic policy instruments and the way economists used to analyse them, even if it is still too early to measure exactly to what extent this is so. Without doubt, the idea that macroeconomic fluctuations were under control is no longer shared. The Great Moderation that developed countries experienced since the mid-1980s and that featured stable output and inflation belongs now to the past.
This economic environment had led to a new paradigm in macroeconomics, according to which economies were thrown into imbalance only by exogenous shocks and not by an accumulation of internal imbalances. Consequences of the aftermath of the 1987 market crash or the bursting of the Internet bubble in 2000 had been properly controlled indeed. Meanwhile, little attention had been paid to financial regulation and the impact that a financial crisis could have on the real economy. Monetary policy was the main instrument of a countercyclical policy conducted as independently as possible, implemented more rapidly than fiscal policy which is subject to political constraints.
But in 2007, the bursting of a speculative housing bubble, mainly in the US, and the subprime crisis in a deregulated financial sector required not only that central banks cut interest rates almost to zero and conduct non-conventional policies but also forced governments to increase their deficits steeply to forestall, ultimately, a new Great Depression. The financial crisis has transformed the economic world. Now we have to interpret it.
Contents:
- Prompt and aggressive responses through monetary and fiscal Policies have headed off a new Great depression
- Post-Lehman Brothers risks
- Non-conventional monetary policy and heavy public deficits: effective weapon in fighting the crisis
- Managing the exit from an exceptional crisis
- Author: Thomas Brand, Economy-Finance Department