Interest rate policy was perceived to be a normal tool of monetary policy and to create few distributional effects. Then the great financial crisis erupted, which led to a steep drop in both output and inflation across advanced economies. This presented central banks with two new challenges. The first challenge was to their objectives.
For the first time in living memory, there was a threat of a deflationary spiral taking hold. This would have led not only to central banks failing their mandates, but to the whole economy sinking into a prolonged depression – just as had happened in the 1930s. The second challenge was to their instruments.