Monetary Policy and Institutions Before, During, and after the Global Financial Crisis

Abstract

This paper describes the changes that occurred in the conduct and in the instruments of monetary policy used by major central banks when the crisis hit, discusses the new tradeoffs and controversies engendered by those policy reactions, and speculates about additional likely future changes in monetary policy and institutions. Following a brief account of the evolution of monetary policy-making principles and institutions in the past the paper abords the controversial question of how and when to exit a period of a large scale monetary expansion. The paper documents the fact that, in spite of huge monetary injections and historically low interest rates, inflation in the US and in the Eurozone remained subdued and reports that since the onset of the subprime crisis there was a dramatic deceleration in the growth of banking credit in the US. The paper also discusses the tradeoff between the lender of last resort function of the central bank and moral hazard, the consequences of bailout uncertainty for central bank policy and the particular problems faced by the ECB in the face of a major financial crisis.

Keywords: Monetary policy and institutions, global financial crisis, inflation and exit policies in the US and the Eurozone, banking credit and reserves, bailout uncertainty