Monetary policy after the crisis

In the aftermath of the financial crisis of 2008 and 2009 there has been a lively debate about what caused the crisis and how the risks of future crises can be reduced. Some blame loose monetary policy for laying the foundations for the crisis. There is also a lively debate about the future of monetary policy, whether it needs to be modified in the light of the crisis, and what its relation to financial stability should be. Here I will discuss the lessons for monetary policy from the financial crisis, the relation between monetary policy and financial stability, the role of monetary policy instruments other than the policy rate, and some issues for emerging markets arising from capital flows and exchange rate movements. My conclusions are as follows: The crisis was not caused by monetary policy but by other factors, mainly regulatory and supervisory failures in combination with some special circumstances, such as low real interest rates due to global imbalances and U.S. housing and housing finance policy. Easy monetary policy in the United States did not cause the crisis. A lesson from the crisis is that price stability is not enough to achieve financial stability. But, importantly, interest rate policy is not enough to achieve financial stability. A separate financial stability policy is needed for financial stability. Given this, flexible inflation targeting—applied in the right way and using all the information that is relevant for the forecast of inflation and resource utilization, including the conduct of financial stability policy when appropriate— remains in my view the best-practice monetary policy before, during, and after the financial crisis. It was financial stability policy that failed and caused the crisis and that needs to be improved, not monetary policy. Monetary Policy after the Crisis