Slide 1

Slide 2 Comments on J. Gagnon:Monetary policy responses to the global financial crisis of 2007/2008 by Heinz Herrmann Slide 3 28/04/2015 Gagnon makes three points CBs interest rate policies were very accommodating during the crisis (sharp reductions) However: Zero-lower bound is a serious constraint (benchmark: Taylor- rule etc.) More stimulating measures (non-standard) should be used to reduce longer-term rates. Slide 4 28/04/2015 Some caveats: Short-term interest rates give a very incomplete picture of monetary policy and challenges for CBs during the crisis. More longer-term refinancing of banks; more generous regarding collaterals; problems in the transmission process. Temptation to try to influence long-term rates understandable, but even more challenging than in normal times. Slide 5 28/04/2015 As a reminder: Good reasons why CBs usually concentrate on setting short-term money market rates: CBs try to avoid distortions in the financial markets and the private sector (ECB-operations shall favour an efficient allocation of resources) CBs want to be flexible CBs want to avoid default risk (by buying private assets) CBs want to avoid impression of government financing (by buying government bonds) Slide 6 28/04/2015 Segmentation/malfunctioning of financial markets an outstanding feature of the crisis (large risk premia, fears of credit crunch ) more demand for non-standard measures however, non-standard measures also of a particular risk as neutrality is endangered due to segmentation of markets Slide 7 28/04/2015 Yield spreads (private bonds) Slide 8 28/04/2015 Yield spreads (government bonds) Slide 9 28/04/2015 Some alternatives: Operation twist of government? Guarantees by the government for private firms to stimulate credit? Modify regulation of Banks to stimulate credit supply? None is without risks and problems. Slide 10 28/04/2015 Some final remarks: Is more expansionary policy the challenge for the future? or rather thinking about exit strategies? thinking about differentiation of monetary policy in different countries in the future?