The Challenge for Macroeconomic Policy in the Wake of the Crisis

Abstract

This chapter examines the US government’s responses to the Lehman Brothers’ failure in September 2008 to prevent a collapse of the financial system and promote economic recovery. Many of the pre-crisis tenets of macroeconomic policy were abandoned as policy-makers were forced to improvise and experiment with a range of interventions. In the early emergency phase, the Federal Reserve (the Fed) expanded its lender of last resort facilities, rapidly reduced its basic lending rate to near zero and established an extensive central bank swap network, while the US Treasury provided financing for bank capital injections and introduced a major fiscal stimulus program. Thereafter, the Fed experimented with unconventional policies of “forward guidance” and “quantitative easing”, which had mixed results, judging by the slow pace of economic recovery. Some of these results reflected conflicts with the government’s public debt policy and its shift to fiscal consolidation after 2010.