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Fourth Quarter 2021, 
Vol. 103, No. 4
Posted 2021-10-18

Monetary Policy and Economic Performance Since the Financial Crisis

by Dario Caldara, Etienne Gagnon, Enrique Martínez-García, and Christopher J. Neely

The analysis in this article was presented to the Federal Open Market Committee as background for its discussion of the Federal Reserve's review of monetary policy strategy, tools, and communication practices. The Committee discussed issues related to the review at five consecutive meetings from July 2019 to January 2020. References to the Federal Open Market Committee's current framework for monetary policy refer to the framework articulated in the "Statement on Longer-Run Goals and Monetary Policy Strategy" first issued in January 2012 (FOMC, 2021).


We review the macroeconomic performance during the Global Financial Crisis and subsequent economic expansion, as well as the challenges in the pursuit of the Federal Reserve's dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-­crisis experience of other major central banks with these policy tools.

Dario Caldara is the chief of the Trade and Financial Studies Section and an economist and Etienne Gagnon is the assistant director of the Program Direction Section and an economist at the Board of Governors of the Federal Reserve System. Enrique Martínez-García is a senior research economist and policy advisor at the Federal Reserve Bank of Dallas. Christopher J. Neely is a vice president and economist at the Federal Reserve Bank of St. Louis.


In this article, we summarize macroeconomic outcomes during the Global Financial Crisis (GFC) and subsequent economic expansion from the point of view of the Federal Reserve's dual mandate. Unemployment rose sharply during the crisis and declined steadily thereafter, whereas inflation persistently fell short of the symmetric 2 percent longer-run inflation goal adopted in January 2012. We highlight that departures from mandated goals reflect structural changes—some preceding the GFC, others brought about by the shock of the GFC—that took time to recognize and may have inhibited the policy response. We then review the evolving policy response through the increasingly forceful use of balance sheet policies (BSPs) and forward guidance (FG), and we assess their efficacy, costs, and risks. We consider how perceptions of the benefits and potential costs likely shaped the deployment of these policies. We explore to what extent more-forceful use of these policies within the then-­prevailing framework could have mitigated the constraints imposed by the effective lower bound (ELB) on the attainment of policy objectives.

The labor market recovery from the GFC was within the range of historical experience, with monetary policy supporting steady job gains despite impairment of some transmission channels. With respect to price stability, longer-run inflation expectations generally proved well anchored during the crisis, but inflation subsequently ran below 2 percent prior to the onset of the pandemic, and some measures of long-run inflation expectations softened to undesirably low levels.

We contend that, under the policy framework at the time, policymakers could have employed accommodation more forcefully. The fact that policymakers did not judge more-­forceful policy to be appropriate, however, especially in the early years of the post-crisis period, was not a shortcoming of the framework but arguably reflected the challenges of conducting monetary policy in an uncertain economic environment using largely untested policy tools. In particular, we describe several structural transformations that were difficult to discern in real time, including a diminished sensitivity of inflation to resource slack, a decline in the natural rate of unemployment, and a decline in the neutral federal funds rate (r*). These transformations limited the scope of federal funds rate policies, weakened the effect of monetary policy on inflation, and revealed the labor market gap to be larger than once thought. Recognition of these changes would have strengthened the case for even greater accommodation.

The evidence shows that the BSPs and FG deployed at the ELB eased financial conditions, supported employment, and helped raise inflation toward 2 percent in a manner roughly consistent with expectations at the time, though much uncertainty remains about the size and persistence of these effects. By contrast, worries that BSPs would disrupt market functioning, induce excessive risk-taking, or fuel inflation did not materialize.

A number of foreign central banks responded to the GFC with strategies and tools that were similar to those used by the Federal Open Market Committee (FOMC). Their experiences highlight the importance of anchoring longer-term inflation expectations, the risk of potentially inconsistent policy actions, and the possibility of pursuing BSPs on a larger scale than the FOMC did.

Read the full article.