A Monetary Policy Strategy in Good and Bad Times: Lessons from the Recent Past

66 Pages Posted: 8 May 2011

See all articles by Stephan Fahr

Stephan Fahr

European Central Bank

Roberto Motto

European Central Bank (ECB)

Massimo Rostagno

European Central Bank (ECB)

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Oreste Tristani

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2011

Abstract

We evaluate the ECB’s monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the strategy was successful at ensuring macroeconomic stability and steady growth despite shocks to the supply side and to the transmission mechanism which complicated the policy process. Emphasis on monetary indicators in the ECB’s monetary policy strategy - the monetary pillar - was instrumental in avoiding more volatile and less predictable patterns of inflation and growth. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to preserve the integrity of the monetary policy transmission mechanism by adopting a comprehensive package of non-standard policy measures. According to our quantitative evaluation of the impact of the non-standard policy package, which notably did not include entering commitments regarding the future path of the policy rate, the liquidity interventions decided in October 2008 and in May 2009 were critical to preserving price stability and forestalling a more disruptive collapse of the macro-economy.

Keywords: Monetary Policy, Monetary transmission, Credit, Supply factors, Financial crisis, Non-standard policy measures

JEL Classification: E31, E44, E51, E58

Suggested Citation

Fahr, Stephan Alexander and Motto, Roberto and Rostagno, Massimo and Smets, Frank and Tristani, Oreste, A Monetary Policy Strategy in Good and Bad Times: Lessons from the Recent Past (May 2011). ECB Working Paper No. 1336. Available at SSRN: https://ssrn.com/abstract=1814928

Stephan Alexander Fahr (Contact Author)

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Massimo Rostagno

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Oreste Tristani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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