Draghi Says Research Confirms Central Banks Not Powerless

The transcript discusses how central banks should respond to crises when standard monetary policy tools, like short-term interest rates, reach their limits. It explores non-standard policies such as forward guidance and quantitative easing (QE), emphasizing the importance of financial frictions. Research shows that these unconventional measures can still support economic stability and inflation, as evidenced by actions taken by central banks in the Euro area and the United States.

What is the primary limitation of standard monetary policy instruments when they reach their effective lower bound?

• They become more effective.

• They cannot be reduced further.

• They increase inflation.

• They stabilize the economy.

How does forward guidance aim to stimulate the economy?

• By committing to low interest rates for a longer period.

• By reducing government spending.

• By promising higher interest rates in the future.

• By increasing short-term interest rates.

What enhances the effectiveness of forward guidance according to recent research?

• Combining it with other non-standard monetary policies.

• Combining it with fiscal policies.

• Relying solely on short-term interest rate adjustments.

• Using it alone without other policies.

What role do financial frictions play in the effectiveness of quantitative easing (QE)?

• They enhance the effectiveness of QE by recognizing leverage constraints.

• They make QE completely ineffective.

• They reduce the need for QE.

• They have no impact on QE.

What has empirical research shown about the success of non-standard monetary policies?

• They have been unsuccessful in supporting the economy.

• They have only been successful in the euro area.

• They have only been successful in the United States.

• They have been successful in supporting the economy and inflation in both the euro area and the United States.