Monetary Policy Before the Crisis

Policy Letter No. 11, 2011

Stefan Gerlach,
Laura Moretti
Research Area:
Macro Finance
Aug 2011
monetary policy, real interest rates, financial crisis

Many observers argue that excessively expansionary monetary policy led to the recent global financial crisis. This column argues that non-monetary forces drove down real interest rates and that lowering nominal rates was the correct response. However, central bankers and other regulators vastly underestimated the risks to financial stability accompanying low short-term interest rates.

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