Implementing Monetary Policy in Crisis times – the Case of the Ecb1

This paper discusses the implementation of monetary policy during the economic and financial crisis of 2007-10. After summarising the different measures adopted by the ECB during these turbulent times, we present a stylised theoretical model that allows us to focus on the main trade-offs faced in implementing monetary policy. We argue that it is the level of key policy interest rates and the width of the interest rate corridor set by the standing facilities, and not the quantity of liquidity that is provided to the market, that are key to sustaining (some) private intermediation in the money market in the presence of increasing credit and liquidity risk. The model highlights the trade-offs faced by central banks when deciding on the degree and timing of its interventions. The main implications of the theory are supported by the empirical evidence.