Comments on J. Gagnon:Monetary policy responses to the global financial crisis of 2007/2008 by Heinz Herrmann
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.
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.
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)
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
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.
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?