First, in response to the Global Financial Crisis of 2008 the Bank increased the supply of liquidity in pesos and dollars – through repos and swaps –, augmented the extensions of the swap program, and broadened the range of eligible collaterals. They were all measures designed to align market rates with the Monetary Policy Rate and to mitigate foreign currency liquidity tensions. Forward guidance was also an important tool. With the Monetary Policy Rate close to zero – we cut the interest rate from 8.25% to 0.5% in less than a year – , communicating that we planned to keep a very low short-term interest rate for an extended period of time. This was essential in keeping medium and long term interest rates low. These measures – as well as some other more exogenous developments such as the rapid recovery of commodity prices – allowed the economy to rebound quite fast from a mild recession in 2009. Actually, in the post-crisis years GDP growth was above 5% in a context of low inflation. Over time, these measures were eliminated, but certainly the lessons we learned from the crisis have been incorporated into our policy analysis and toolkit. Among the most significant I would mention two: First, the fact that the central bank must be rapid to respond and use all the available tools if necessary.
In essence, all policy actions by the Fed, the ECB, the banks of Japan, England, Canada, and of many small open economies in the last 6 years have been about affecting long-term rates by influencing one, and often times more, of these interest rate components. Take the case of forward guidance. When nominal rates reached the ZLB, and particularly due to the low inflation environments, traditional monetary policy became very constrained –fully constrained by definition, one might say, given the impossibility of lowering short term rates any further. However, to the extent that one can credibly influence the expected path of future monetary policy actions, risk-neutral rates at different horizons can be lowered, perhaps even significantly so. However, as pointed out by Mike Woodford in an influential paper presented at Jackson Hole a few years ago, to truly make a dent on rates with this strategy, central bankers were likely to run into a temporal-inconsistency problem. This problem is basically that in the event that long-term rates can be reduced enough to jump-start the economy, the expost optimal policy stance would be inconsistent with the one promised in the midst of stagnation.