After the crisis began, major central banks were soon forced to lower interest rates to the effective zero lower bound. Or so we thought at the time: some central banks are now testing the bound by bringing interest rates further and further below zero. Even so, it is clear that there must be some effective lower bound on interest rates. Furthermore, negative rates, if maintained over a significant period of time, may result in financial market distortions; for example by causing lasting damage to the money market fund business model. Central banks responded to this new challenge through a variety of unconventional measures which included what is known now as quantitative easing (or QE). However, there is still no full agreement about the effectiveness and the collateral effects of these unconventional policies. (I will speak about some of its side-effects a bit later). Even before the debate about the limits of IT frameworks at a zero-lower bound, many economists, particularly in academia, proposed innovative monetary policy regimes such as price-level or even nominal GDP targeting. These regimes were seen as more powerful in the zero lower bound because they would effectively require central banks to make up for periods of below-target inflation or nominal GDP growth by keeping rates lower than required under IT after the economy recovers.
There is still disagreement, however, on how to deal with flows, on who bears the burden of adjustment, and on the scope for global policy cooperation. However, there is perhaps a deeper lesson to be drawn from the global financial crisis. The crisis came largely as a surprise; not because we did not see the bubbles forming, but rather because the central banking community as a whole failed to fully take into account the vulnerabilities resulting from the growth of the shadow banking sector, the opacity of the novel financial instruments that helped fuel the bubble, and the complex domestic and international linkages between different financial sector intermediaries. A fundamental lesson to be drawn from the global financial crisis is the need to develop an integrated, forward-looking approach to central banking that brings together: •  Comprehensive, granular (and perhaps “real time”) financial sector surveillance that focuses on identifying systemic risk and develops adequate market infrastructure and reporting systems;  •  Market intelligence that captures short, medium and long-term trends in the financial system, including, for example, the potential impacts of the rapid evolution of electronic trading platforms and algorithmic investment strategies; and  4  BIS central bankers’ speeches  •  Research and analysis that spans monetary, exchange rate, and macroprudential policies. We have made some progress in this direction here at the Central Bank of Brazil, but we expect to continue to develop this integrated approach to central banking for some years to come.