The Effectiveness of Monetary Policy since the Onset of the Financial Crisis

In the wake of the Great Recession, a massive monetary policy stimulus was provided in the main OECDeconomies. It helped to stabilise financial markets and avoid deflation. Nonetheless, GDP growth has beensluggish and in some countries lower than expected given the measures taken, and estimated economic slackremains large. In this context, this paper assesses the effectiveness of monetary policy in recent years. It findsthat notwithstanding an almost full transmission of policy interest rate cuts and unconventional policy measuresto higher asset prices and lower cost of credit in and outside the banking sector in most countries, with theexception of vulnerable euro area economies, monetary policy stimulus did not show up in stronger growth dueto a combination of three factors. First, lower policy interest rates may not have provided as much stimulus asexpected given the evidence of a decrease in natural interest rates, resulting from the estimated decline inpotential GDP growth in the wake of the crisis. Second, balance sheet adjustments of non-financial companiesand households, large uncertainty as well as simultaneous and considerable fiscal consolidation in many OECDcountries constituted important headwinds. Third, the bank lending channel of monetary policy transmissionappears to have been impaired, mainly due to considerable balance sheet adjustments and prevailinguncertainty, which together limited banks’ capacity and willingness to supply credit. The paper also stresses thatthe monetary accommodation risks having unintended negative consequences which are likely to increase withits duration.