The European Central Bank acted decisively by deploying a range of conventional and unconventional monetary policy measures, allowing to reduce financial fragmentation, avoid deflation, and support price stability and thereby the economic recovery. While an effective lower bound for short-term interest rates exists, monetary policy, shifted to steering medium to long-term rates despite of its higher dependency on international capital markets.
By contrast, while EMEs were hit by liquidity constraints, which I referred to earlier in the Indian context, the stability of balance sheets as a result of a more “traditional” structure helped to preserve the systems’ capacity to provide finance. Liquidity infusions quickly transmitted through to businesses and helped prevent the escalation from liquidity to solvency problems.