By far the most visible innovation since the beginning of the Great Recession however, has been the increase in the array of instruments used for monetary policy purposes, particularly forward guidance about interest rates and most notably the use of central banks’ balance sheets through Large Scale Assets Purchases (LSAP, i.e. Quantitative Easing or QE). In theoretical debates, other proposals were made namely, to change the targets of monetary policy to price level targeting or to nominal GDP or simply, to increase the established objective of 2% in inflation targeting regimes to 3% or 4%. For practical reasons, these proposals were not retained and forward guidance and QE were the new instruments of choice for many central banks. Before the crisis, the established instrument of monetary policy was a short-term interest rate steered either by traditional open-market operations of buying and selling securities or through temporary lending to banks via repos, like in the ECB’s case. After the crisis, all major central banks significantly increased their balance sheets and the respective monetary base. BIS central bankers’ speeches  1  Chart 1  It would, nevertheless, be misleading to compare the changes in balance sheet size as if they were originated by the same policies and, consequently, had the same impact. The case of the ECB is different from the other central banks as the expansion of the balance sheet happened as the result of lending to the banks through repos of different maturity.
As mentioned, the transmission channels at play in the recent QE experiences are indeed different from the traditional quantitative view. Chart 2  The ECB monetary policy in the European crisis. As the financial crisis led to the Great Recession and then evolved into the European sovereign debt crisis, the ECB started providing liquidity in fixed-rate full allotment mode, progressively and considerably extended the maturity of its loans to commercial banks, widened the set of eligible collateral, made medium-scale purchases of financial assets and announced the Outright Monetary Transactions programme. As a result of these extraordinary measures, at the end of 2012 calm started returning in financial markets, leading to lower financial spreads and a reduction in volatility. The initial  2  Quoted by Michael Woodford in his 2012 Jackson Hole paper “Methods of policy accommodation at the interest rate lower bound”. 4  BIS central bankers’ speeches  signs of economic recovery started appearing. Preliminary formal analyses indicate that nonstandard measures were instrumental in supporting financial intermediation and economic activity in the euro area.3 Despite these recent, encouraging developments on the financial side, real economy recovery has been weak and inflation outcomes have been surprisingly low. The new challenge we face in the euro area today is to avert the risk of a prolonged period of excessively low inflation. Euro area annual HICP inflation was 0.5% in May 2014, after averaging 0.7% in the first four months of the year.