Unnerved by the scale and sweep of the crisis, governments and central banks around the world responded with an unprecedented show of policy force. The size and pace of monetary and fiscal expansion raised a paradoxical situation – even as governments and central banks coordinated and cooperated, many of their familiar conflicts got played out once again.
Central banks reduced policy rates ferociously, and in many advanced countries the rates are at or near zero. This is the standard tool of monetary policy whereby central banks expect to influence interest rates at the long end, and steer financial conditions and hence the entire economy by adjusting the short term rates. Even in normal times, monetary policy transmission is lagged.