Monetary Policy Implementation during the Crisis in 2007 to 2008

Since the outbreak of turbulence in the financial markets in August 2007, the implementation of monetary policy – typically a peripheral aspect for observers of monetary policy – has attracted increased attention. The heightened attention was accompanied by uncertainty about how to interpret the liquidity measures taken and what to make of the new instruments introduced. This contribution provides the facts needed to properly understand central bank measures by focusing on the euro area and the U.S.A. Essentially, observers need to be aware that today, the main avenue of monetary policy implementation is interest rates rather than monetary aggregates such as the monetary base. Moreover, adjusting the liquidity implementation framework is not necessarily tantamount to changing the monetary policy stance. Finally, the specific institutional frameworks of individual central banks have a bearing on how they implement monetary policy. The contribution concludes with a description of possible techniques for implementing monetary policy under very low interest rates.