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Monetary Policy in a Downturn: Are Financial Crises Special?

Morten Bech (), Leonardo Gambacorta () and Enisse Kharroubi

International Finance, 2014, vol. 17, issue 1, 99-119

Abstract: This paper analyses the effectiveness of monetary policy during downturns associated with financial crises. Based on a sample of 24 developed countries, our empirical analysis suggests that monetary policy is less effective following a financial crisis as the monetary transmission mechanism is partially impaired. In particular, our results suggest that the benefits of accommodative monetary policy during a downturn are elusive when the downturn is associated with a financial crisis. In addition, we find that private sector deleveraging during a downturn helps to induce a stronger recovery.

Date: 2014
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