Nr. 5 (2022): The Eurosystem’s monetary toolbox in unconventional times

Central banks worldwide have deployed a range of new monetary policy instruments in response to extraordinary crisis circumstances and persistently low inflation. As a response to the crises – the Global Financial Crisis (GFC), the European sovereign debt crisis and the COVID crisis – central banks intervened to keep markets functioning and prevent fragmentation in the euro area. Moreover, while interest rates continued to decline, inflation remained persistently below the two percent target. With conventional policy space constrained by the effective lower bound (ELB) of interest rates, central banks have vastly expanded their toolkits to fulfil their mandates. More than a decade of implementing so-called “unconventional monetary policy” (UMP) tools has increased central banks’ footprint in financial markets in an unprecedented fashion as central bank balance sheets expanded to levels that are usually associated with extreme events such as wars and severe economic crises (Figure 1.1).