This despite the fact that the economy was in the midst of a productivity-driven boom, the longest expansion on record, and the prevailing federal funds rate was 5.25 percent. These papers and the ensuing discussions and debates planted seeds that would germinate in research and policymaking. Central banks across the globe ultimately used variations of nearly all of the tools discussed at the conference. Indeed, the topics of interest rate policies, targeting asset prices, asset purchases, and negative interest rates are among the most prominent discussions in monetary economics today. Importantly, this research made its way straight to policymakers within a few years—a quick turnaround by central bank standards! In January 2002, Marvin, Dave, and I reprised our roles from the conference in briefings to the FOMC.10 And in June 2003, Vince Reinhart briefed the FOMC on alternative monetary policy approaches—including asset purchases and forward guidance—to mitigate the effects of the ZLB.11 This was followed by a flurry of further research by academics and central bank economists that delved deeper into these topics.12  Putting Research into Practice This research had important practical lessons for policymakers in the United States and abroad following the global financial crisis.
But equally it would be wrong to jump to the opposite extreme, given there are clearly major welfare gains from improved choice of financial products and better matching of risks. 41 So what are some of the lessons for financial innovation? What will the landscape look like in 5-10 years’ time, once the dust has settled and institutional changes can be implemented to address the frictions identified? What if anything can policy do to facilitate or expedite this process of adjustment? 42 A first observation is that it is important to distinguish between different financial products. As shown in Table 1, there has been a huge dispersion in activity in different innovative products over the past year. For example, the corporate CDS market grew by 36% in the second half of 2007 and appears to be underpinned by strong demand. Other derivative and option markets have also continued to grow very rapidly. But on the other hand, new issues of corporate CDOs, CLOs and ABS CDOs have virtually completely stopped. Complex structured products with a high premium on information requirements and with a high bespoke element have thus fared much worse than simpler innovative instruments where there is more natural two-way trading and liquidity. Moreover, it is important not to lose sight that the success of some products and failure of others is a standard feature of the innovation process and of a competitive economy.