Gagnon makes three points

2. Comments onJ. Gagnon: Monetary policy responses to the global financial crisis of 2007/2008by Heinz Herrmann

3. Gagnon makes three points → CBs interest rate policies were very accommodating during the crisis (sharp reductions) → However: Zero-lower bound is a serious constraint (benchmark: Taylor- rule etc.) → More stimulating measures (“non-standard”) should be used to reduce longer-term rates.

4. Some caveats: → Short-term interest rates give a very incomplete picture of monetary policy and challenges for CBs during the crisis. → More longer-term refinancing of banks; more generous regarding collaterals; problems in the transmission process. → Temptation to try to influence long-term rates understandable, but even more challenging than in normal times.

5. As a reminder: Good reasons why CBs usually concentrate on setting short-term money market rates: → CBs try to avoid distortions in the financial markets and the private sector (ECB-operations shall favour … “an efficient allocation of resources”) → CBs want to be flexible → CBs want to avoid default risk (by buying private assets) → CBs want to avoid impression of government financing (by buying government bonds)

6. Segmentation/malfunctioning of financial markets an outstanding feature of the crisis (large risk premia, fears of credit crunch …) → more demand for “non-standard” measures → however, “non-standard” measures also of a particular risk as “neutrality” is endangered due to segmentation of markets

7. Yield spreads (private bonds)

8. Yield spreads (government bonds)

9. Some alternatives: → Operation twist of government? → Guarantees by the government for private firms to stimulate credit? → Modify regulation of Banks to stimulate credit supply? None is without risks and problems.

10. Some final remarks: Is more expansionary policy the challenge for the future? or rather → thinking about exit strategies? → thinking about differentiation of monetary policy in different countries in the future?