Monetary Policy Effectiveness in the Period of Economic Crisis

Since 2007, many monetary authorities have drastically changed its monetary policy. They began an aggressive struggle with the biggest economic crisis since the Great Depression. Despite the substantial decline in Central banks interest rates in US and EMU and despite the sharp easining of monetary policy in many other countries, the cost of credit to both households and businesses has generally risen in almost every country. All this leads to the question of whether monetary policy becomes less effective in periods of recession or not. The goal of this paper is to empirically examine the hypothesis of reduced effectiveness of monetary policy in period of economic crisis. The paper starts with assertions: (i) the money supply, in the narrow sense (M1) is determined by the monetary base (M0) and money multiplier (m), and (ii) monetary authority have full control on monetary base, while the money multiplier are only partially determined by monetary authority. It is also determined by the actions of non-banking public and the banks, and because of that monetary policy effectiveness could decrease in the period of economic crisis. Based on a sample of six countries this paper examines the strength of the relationship between monetary aggregates during recessions and in period out of recessions, and according the obtained results appropriate conclusions and explanations are offered.