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