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Monetary Perspectives on the Financial Crisis
Jordi Galí CREI, UPF and Barcelona GSE
June 2014
Monetary Policy in “Normal Times”
Policy rates
Market interest rates
Aggregate demand
Output, employment,
inflation
Objective: Price stability
Source FRB Dallas
Central Banks’ Response to the Crisis: Policy Rates
Monetary Policy during the Financial Crisis
Policy rates
Market interest rates
Aggregate demand
Output, employment,
inflation
Market Interest Rates: Loan rates vs. Euribor
Font: Banco de España, Informe Mensual
Policy rates
Market interest rates
Aggregate demand
Output, employment and inflation
Monetary Policy during the Financial Crisis
Font: Banco de España, Informe Mensual
Bank Loans Growth Rate: Spain, 2005-2010
Font: Banco de España, Informe Mensual
Bank Loans Growth Rate: Spain, 2011-2014
Policy rates
Market interest rates
Aggregate demand
Output, employment,
inflation
Monetary Policy during the Financial Crisis
Monetary Policy under Greenspan and Bernanke: Pre-Crisis
Font: Galí (2011)
Font: Galí (2011)
Monetary Policy under Greenspan and Bernanke
Monetary Policy in the Euro Area
Font: Galí (2011)
Slow Recovery: Euro Unemployment Rate
Slow Recovery: U.S. Employment Ratio
Slow Recovery: What to do?
Unconventional Monetary Policy? ◦ ECB: LTRO, TLTRO ◦ FED: QE, forward guidance
ECB Balance Sheet: Liabilities
Font: ECB, Annual Report 2013
Font: Atlanta Fed (Economic & Financial Highlights)
Fed Balance Sheet: Liabilities
Slow Recovery: What to do?
Unconventional Monetary Policy? ◦ ECB: LTRO, TLTRO ◦ FED: QE, forward guidance
limited effectiveness Labor cost reductions (wages, payroll
taxes,...)? Fiscal expansion? ◦ Debt and taxes already too high
Slow Recovery: What to do?
Unconventional Monetary Policy? ◦ ECB: LTRO, TLTRO ◦ FED: QE, forward guidance
limited effectiveness Labor cost reductions (wages, payroll
taxes,...)? Fiscal expansion? ◦ Debt and taxes already too high ◦ Alternative: money-financed public investment
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