Especially on my side of the Atlantic, during the European debt crisis, these transmission channels became impaired.8 This severely restricted the ability of policy rate cuts that central banks had implemented to stabilize the real economy.
Central banks ultimately had to resort to unconventional monetary policy tools, to restore the pass-through of lower policy rates to firms and households.9 A sound financial sector therefore enhances the effectiveness of monetary policy by improving the functioning of the monetary transmission mechanism. It helps monetary policy achieve its objectives with less effort, and reduces the likelihood that the effective lower bound is reached.