Monetary policy during financial crises: Is the transmission mechanism impaired?

Abstract

The effects of monetary policy during financial crises differ substantially from those in normal times. Using a panel VAR for twenty advanced economies, we show that monetary policy has larger and quicker effects during financial crises on output and inflation, and also on various other macroeconomic variables like credit, asset prices, uncertainty, and consumer confidence. The effects on output and inflation are particularly strong during the acute phase of financial crises when the economy is also in recession, while they are weaker during the subsequent recovery phase. We find differences in the size and the timing of monetary policy actions during the global financial crisis of 2008/09 across countries that may have contributed to the different macroeconomic performance across countries.

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