The Monetary Policy Response to the Financial Crisis in the Euro Area and in the United States: A Comparison

Domenica Tropeano

Chapter 2 in Europe and the Financial Crisis, 2011, pp 28-45 from Palgrave Macmillan

Abstract: Abstract The financial crisis of 2007–8 has caused the melting down of the financial markets over the world. Globalization, jointly with increased interconnectedness among financial institutions in different countries, has caused a real freezing of many transactions on financial markets. The global aspect of the last crisis is what distinguishes it from previous episodes of financial crises and also from other recent world financial crises such as the Asian crisis. The policy response to the crisis has also been quite similar in the euro area and in the United States, with differences arising from the respective legislative backgrounds. The striking point is that all the most important central banks seemed to be unaware of the dangers of the increasing volume of transactions in financial markets and of the complicated web of mutual relations among financial institutions all over the world for a long time after the crisis started in the United States in August 2007. The Federal Reserve started with a modest lowering of the interest rate, which was followed by many rounds of further falls, but it did not realize the gravity of the problem until halfway through 2008, when it started using less conventional tools and acting, rather than as a lender of last resort, as a market-maker of last resort. The ECB exhibited even less awareness of the global dimensions and gravity of the crisis; in the middle of the financial turmoil, it decided to raise the interest rate, which was already higher than the Federal Reserve’s rate, by 0.25 base points.

Keywords: Interest Rate; Monetary Policy; Financial Crisis; Central Bank; Financial Institution (search for similar items in EconPapers)
Date: 2011
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Working Paper: The monetary policy response to the financial crisis in the Euro area and in the United States: a comparison (2010)
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DOI: 10.1057/9780230305007_3

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