Here, I will argue that the standard tool of central banks – changes to the short-term interest rate – can lose some of its potency if the sudden unravelling of imbalances threatens financial stability and impairs the transmission mechanism. But I will also claim that new untested instruments were deployed which largely replaced standard monetary policy interventions.
This is perhaps the most relevant lesson we can draw from the crisis. Monetary policy transmission Let me briefly elaborate on the transmission mechanism of monetary policy. You can see here on slide 2 why the monetary transmission mechanism is so important for central banks.