Monetary Policy in the Crisis – Financial Crisis

Monetary Policy in the Crisis – Financial Crisis
Daily Voice News

Monetary Policy in the Crisis
The response of monetary authorities was both strong and swift across
the globe. The major central banks coordinated a significant rate cut of
50 basis points on October 8, 2008, in an attempt to increase liquidity and
to boost confidence by demonstrating that they were prepared to act decisively.
During the crisis, every member of the Group of Twenty (G-20)

major economies cut interest rates. By March 2009, the Federal Reserve,
the Bank of Japan, and the Bank of England had all cut rates to 0.5 percent
or less, with the Federal Reserve and the Bank of Japan approaching the
zero nominal lower bound. The European Central Bank (ECB) responded
slightly more slowly but still cut its policy rate more than 3 percentage
points to 1 percent by May 2009 (Figure 3-9). Emerging market countries
and major commodity exporters, whose economies were growing fast in the
summer of 2008, moved as well, but not to the near-zero levels seen at the
major central banks.

Besides cutting interest rates, three of the largest central banks used
nonstandard monetary policy as well. As Figure 3-10 shows, the Federal
Reserve and the Bank of England more than doubled the size of their balance
sheets in 2008 (see Chapter 2 for more details on the Federal Reserve’s
actions). The two banks bought large quantities of assets, substantially
increasing the supply of reserves, and made loans against a variety of asset
classes. The goal of these programs was to free up credit in markets that
were being underserved through purchases of, or loans against, asset-backed
securities and commercial paper. The ECB also expanded its balance sheet
substantially (37 percent) in 2008 and made loans against a variety of assets,
but it did not undertake the same level of quantitative easing as either the
U.S. or U.K. central banks. The Bank of Japan did not expand its balance

While it did expand some of its lending programs
in corporate bond markets, its policies were more oriented to financial
markets than to quantitative monetary policy. As noted earlier, Japan’s
inflation rate has been negative.

the rapid growth of central bank balance sheets
halted during 2009, but the central banks have not withdrawn the liquidity
they injected into the system. Similarly, policy interest rates have remained
constant since December 2008 in the United States and Japan and since the
spring of 2009 in the euro area and the United Kingdom. Some commodity
producers and smaller advanced nations with strong growth have begun to
withdraw some monetary accommodation. Australia, Israel, and Norway
have all raised policy interest rates. Also, authorities in countries such as
China and India had not raised main policy rates as of the end of 2009, but
they have made administrative changes that tightened lending to slow the
expansion of credit as their economies began to grow more quickly.
In addition to lending support, authorities directly intervened to
support the banking sectors in a number of countries. Countries took many
actions on their own, ranging from the policies pursued in the United States
such as the Troubled Asset Relief Program (discussed in Chapter 2), to direct
takeovers of some banks in the United Kingdom, to the creation of other

entities to centralize some bad assets and clean the balance sheets of other
banks in Switzerland and Ireland, to general support and guarantees in a
wide range of countries. Daily Voice News – Global News – You Can Listen the news this channel
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