Contemporary Finance

20Monetary Policies Since the Global Financial Crisis

The global financial crisis ushered in a sequence of stress events that have disrupted financial markets and the economy and to which public policies have been forced to respond. The conduct of monetary policy has changed dramatically.

The crisis posed two fundamental policy challenges: its severity, with large intermediaries failing and market functioning impaired, and the low level of interest rates when it began. Since the onset of the crisis, monetary policy in advanced economies has wrestled with a basic problem. With short-term nominal interest rates close to zero or even negative in some currencies, the core of central bank operations is disabled. The central bank cannot drive rates much below the zero or effective lower bound (ELB), a modestly negative level of rates, limiting the efficacy of conventional monetary policy.¹

20.1 The Monetary Policy Response to the Global Financial Crisis

Central banks introduced new tools to implement “extraordinary accommodation.” At first, variations on existing interest rate tools were employed and, eventually, new types of operation, administered rates, and standing facilities.

20.1.1 Interest on Reserves

Shortly after its earliest intervention in August 2007 (see Chapter 18), expanding open market operations (OMOs) to additional times of day, and acceptance of an unusually high volume of mortgage-backed securities (MBS) rather than Treasurys as collateral, the Fed began lowering ...