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Across central banks, there has been no standardisation of non-standard measures: approaches are distinct, tailored to the respective economies and their structures.

1. Introduction

We have seen enhanced credit support, credit easing, quantitative easing, interventions in foreign exchange and securities markets, and the provision of liquidity in foreign currency — to name but a few of the measures taken. These tools have been used to support the functioning of the financial sector, to protect the real economy from the fallout of the financial crisis, and, ultimately, to preserve price stability over the medium term.

James Rickards on Complexity, Economic History, and the Coming Financial Crisis

Some view them as the continuation of standard policy by other means. Once nominal interest rates cannot be lowered further, central banks use other tools to determine the monetary policy stance — that is, to contribute in the desired way to economic, financial and monetary developments in pursuit of price stability.

Figuratively speaking, this can be compared to — once the end of the road has been reached — engaging the four-wheel drive. Central banks expand their balance sheets and inject liquidity so as to influence the structure of yields and returns and thereby stimulate aggregate demand. This approach would be broadly in line with the theoretical analyses and prescriptions of Friedman, Tobin or Patinkin. The logic of this approach is essentially sequential: first the standard measures, then the non-standard measures.


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If this sequential logic were also to be applied to the exit, it would essentially mean unwinding non-standard measures first and subsequently raising interest rates. At the ECB, we have a different view of our non-standard measures. We set our key interest rates at levels we consider appropriate to maintain price stability, drawing on our regular comprehensive assessment of economic and monetary conditions.

In other words, we have followed our standard practice in this regard. But on several occasions, the monetary policy stance established in this way faced obstacles in being transmitted to the euro area economy. During the financial crisis, market functioning was impaired. In response, we acted to overcome some severe malfunctioning that was hampering the channels of transmission of our policy. We introduced measures to help restoring a more effective transmission of our monetary policy stance to the wider euro area economy.

Staying with the image of the road, I would say that we sought to remove the major roadblocks in front of us, so that our policy stance could be transmitted to the economy in the intended way. The logic of this approach is therefore parallel and supportive: if the transmission of the standard measures is impeded in a very significant way, non-standard measures can offer support.

This logic has potentially very clear implications for the exit: we consider that we can determine standard and non-standard measures largely independently. We consider that we are not bound to unwind non-standard measures before considering interest rate increases; we could do one or the other or both. One set of measures depends on the outlook for price stability, the other depends on the degree of functioning of the monetary policy transmission through the financial system and financial markets. With this overview of guiding principles in mind, I would like to discuss the three crucial elements of our monetary policy discussions during the financial crisis in more detail: the unwavering pursuit of price stability, our primary objective; the role of standard policy measures in pursuing that goal; and the support provided by the non-standard measures that we have introduced in recent years.

As some of you will remember, such quantification of our definition was initially much criticised, but over time has become fully accepted. Some doubts of the critics have proved unfounded. Nor has it hindered employment creation: between and the second quarter of euro area employment grew by What is more, can I say that I was also impressed by a recent speech of my colleague and friend, Chairman Ben Bernanke.

At the same time, it seems to me that our medium-term orientation has become more fully understood. We need to look beyond the impact of transient shocks to price developments and thus beyond the standard two to three-year horizon of conventional macroeconomic projections.

Indeed, we condition our policy-relevant horizon on the nature and magnitude of the shocks hitting the economy. The nature and magnitude of the shocks faced during the financial crisis imply that the relevant notion of medium term might be somewhat longer than in more normal circumstances.

Reflections on the nature of monetary policy non-standard measures and finance theory

With these definitional issues largely resolved, there are two points that I would particularly like to highlight today. First, the precise quantitative nature of our definition of the price stability objective has proved crucial in anchoring longer-term inflation expectations. And, as a result, it has protected us against both upside and downside risks to price stability, even in these most turbulent of times. The anchoring of private inflation expectations induces a self-correcting mechanism in response to temporary disturbances in price developments, thereby easing the burden on monetary policy.

In short, the quantitative definition has helped protect us against the materialisation of the risks of deflation, even at the darkest moments of the crisis. Second, the quantitative definition facilitates accountability. The average annual inflation rate in the euro area since January has been 1.

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This represents an achievement that is worth taking note of. It is, moreover, the best result in the major euro area countries in over 50 years. How could these results be achieved in the face of financial crisis? These rates have always been set at levels which the Governing Council has deemed appropriate for the delivery of price stability over the medium term. In considering the implementation of standard monetary policy measures during the financial crisis, two issues are worth particular attention.

First, the close relationship normally observed between the key policy rate and short-term money market rates assumed a more complex form during the crisis. Let me emphasise that the Governing Council has never pre-committed to future interest rate decisions. It did not do so during the financial crisis. The main reason in our view is the need for the central bank to retain the ability to react to unforeseeable contingencies without destabilising market expectations.

But, in the challenging context of financial crisis, standard monetary policy proved insufficient.

Conference program — Dialogues in turbulent times

Standard measures have been complemented by a variety of non-standard measures, which have aimed to support the effectiveness and transmission of interest rate decisions. As I mentioned at the outset, the ECB did not embark on non-standard measures because we thought the scope for further standard easing of the monetary policy stance had been exhausted. Rather, our view was that non-standard measures were required to ensure that the stance of monetary policy was effectively transmitted to the broader economy, notwithstanding the dysfunctional situation in some financial markets.

First, the functioning of the euro interbank money market was impaired, to a greater or lesser extent, from the bankruptcy of Lehman Brothers in September through the whole of Given the crucial role of wholesale money markets for monetary policy transmission, dangers were immediately apparent. The flow of credit to the productive sectors of the economy — households and firms — was at risk, as banks faced massive uncertainty about their access to liquidity and funding, both in euro and foreign currencies.

Concerns about the impact of such tensions on bank credit supply were particularly acute in the euro area, given the preponderance of bank loans in corporate financing. To contain these risks, prompt and decisive action needed to be taken: full allotment, the lengthening of maturities in liquidity provision, the expansion of collateral, the provision of liquidity in foreign currencies and a covered bond purchase programme to support this systemically important market in Europe.

Jesper Jespersen. Ozgur Orhangazi. Mehmet Ugur. Riccardo Fiorentini. Riccardo Bellofiore. Blandine Laperche. Brendan Sheehan. Eckhard Hein. Home Contact us Help Free delivery worldwide.

The Economics Of Financial Turbulence Alternative Theories Of Money And Finance

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