Lessons for monetary policy strategies from the recent past

We evaluate the ECB’s monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the ECB’s strategy was successful at ensuring macroeconomic stability and steady growth. Emphasis on monetary indicators in the policy process - the monetary pillar of the ECB’s monetary policy strategy - was instrumental in avoiding more volatile and less predictable patterns of inflation and output growth. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to preserve the integrity of the monetary policy transmission mechanism by adopting a comprehensive package of non-standard policy measures. The liquidity interventions decided in October 2008 and in May 2009 were critical to preserving price stability and forestalling a more disruptive collapse of the macroeconomy.