The paper analyses the monetary policy responses of the European Central Bank
(ECB) to the global financial crisis and the European sovereign debt crisis.
Our goals are on the one hand to explain chronologically the main measures in
conventional and unconventional policies adopted by the ECB and on the other
hand to analyse their effects on key interest rates, monetary aggregates and
the money multiplier. The assessment is that the ECB?s monetary policy
responses to the crisis have been ?too little, too late?, constrained by the
institutional framework, which prevents the ECB from acting as a true central
bank with the role of lender of last resort.
Financial crises frequently increase public sector borrowing and threaten some form of sovereign debt crisis. Until recently, high income countries were thought to have become less vulnerable to severe banking crises that have lasting negative effects on growth. Since 2007, crises and attempted reforms in the United States and Europe indicate that advanced countries remain acutely vulnerable. Best practice from developing country experience suggests that regulatory constraints on the financial sector should be strengthened, but this is hard to do in countries where finance has a great deal of political power and cultural prestige, and where leverage is already high.
Purpose
– How can laboratory experiments help us understand banking crises, including the usefulness of various policy responses? After giving a concise introduction to the field of experimental economics more generally, the author attempts to provide answers. The paper aims to discuss this issue.
Design/methodology/approach
– The author discusses methodology and surveys relevant work.
Findings
– History is often too complicated to be meaningfully revamped or modified in the lab, for purposes of insight-by-analogy. But as people argue about how to understand financial history, they bring ideas to the table. It is possible and useful to test the empirical relevance of these ideas in lab experiments.
Originality/value
– The paper pioneers broad discussion of how lab experiments may shed light on banking crises.
ECB policy responses between 2007 and 2014: A chronological analysis and an assessment of their effects
