Monetary Policy in Extraordinary Times

The financial turbulence that began in the U.S. subprime-mortgage market in August 2007 reached maximum intensity towards the end of 2008, and enveloped the entire global economy. Strains that had previously been concentrated in a few major financial centers turned into a full-blown crisis, affecting both industrial and emerging-market economies through trade, financial, and confidence channels.
Policy-makers reacted quickly, applying unprecedented monetary and fiscal stimulus as the gravity of the situation became clear. For central banks, this involved pushing target interest rates to historic lows and providing emergency liquidity on an extraordinary scale. Although a number of "green shoots" have recently appeared and the global economy is no longer deteriorating at an accelerating rate, we remain in the midst of the deepest and most synchronous contraction of the postwar period.
Many central banks have tested the limits of their traditional monetary policy instruments and have turned to so-called "unconventional" measures. Others are giving unconventional measures serious consideration. These instruments are unfamiliar and there is a great deal of confusion over exactly what they are and how they work. Some observers believe that they will be largely ineffective, making a deflationary spiral inevitable. Others worry that they will be too effective, or will be left in place too long, leading to an inflationary spiral. Either way, unconventional monetary policy instruments are regarded by many as a decidedly risky option. While it's too early to draw strong conclusions, the experience to date with unconventional measures has been largely positive. Brought to you by Moishe Alexander.