Question

What major theoretical issues in monetary macroeconomics emerged into public debate in connection with the 2007-8 financial crisis and the efforts of central banks to mitigate its effects?

Answer 1

One of the major issues that came up in the aftermath of the 2007-08 crisis was the inability of the monetary policy when the nominal interest rates hit the 0 level. In theory, if the nominal interest rates can not be lowered further, the monetary policy has become ineffective and can not be used to fight a recession (zero lower bound, ZLB)

The central banks have tried to mitigate this by following unconventional monetary policy like the Quantitative Easing programme in US and Euro. This involves buying long term government securities by the central banks. Several central banks in Europe have also experimented with negative interest rates. Some deposit rates are set as a low negative number in order to assess if the ZLB actually holds. Banks are also considering rasing the inflation targets such that the natural rates of interest risesa nd nominal interest rates will not be hitting the zero level.