Central banks were in the midst of global financial crisis, which has exposed the difficulties of macroeconomic regulation in the world. Despite the antirecessionary measures of governments and central banks, they were not able to bring the situation under control because of the interconnectedness of the financial system and the heterogeneity of the impact of external developments on domestic economic policies. The global financial crisis has clearly demonstrated the shortcomings of supervisory and regulatory systems of most countries, showed the need to improve monetary policy instruments, as well as the functions of regulators and central banks in ensuring financial stability.
Since the beginning of the financial turmoil, central banks of several countries (USA, UK, EU, Japan, Australia, Switzerland) have taken emergency measures in the monetary area to prevent the financial crisis, namely reduction of basic interest rates. In countries with developed economies these interest rates were reduced almost to zero. For example, from December 2008 the Fed’s federal funds rate was in the range of 0,00-0,25%. Since May 2009, the ECB base rate for refinancing operations was set at 1%. The basic discount rate of the Bank of Japan since October 2008 was about 0.30%. (Trichet, 2009)
Despite the active role of central banks to combat the financial crisis, the traditional methods of monetary policy were not sufficiently effective. Therefore, many central banks were forced to use unconventional measures and expand the tools of monetary policy. One of the first non-standard measures to combat the financial crisis has taken the ECB, reducing the base interest rate on refinancing operations from 4.25% in July 2008 to 1% in May 2009
Also, since 2007 the Federal Reserve, in reaction to financial turmoil, has also used various mechanisms: increasing the size of monetary intervention, discovery, and lengthening the term of credit windows, reducing the refinancing rate (discount rate) and the federal funds rate. (FRS 2010)
Trichet, J. (2009). “The financial crisis and the role of central banks – the experience of the ECB”. Keynote at the international symposium marking the 50th anniversary of Bank Al-Maghrib, Marrakech. Retrieved from: http://www.ecb.int/press/key/date/2009/html/sp090529.en.html.
FRS, 2010. “The Federal Reserve’s response to the crisis”. Retrieved from: http://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm