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