Monetary policy before the crisis

Publication: Policy Letter No. 11, 2011
Topic Area: Macro Finance
Authors: Stefan Gerlach,
Laura Moretti
Date: Aug 2011
Keywords: monetary policy, real interest rates, financial crisis
Abstract:

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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